Saudi Arabia A Guide To The Market by HSBC

MENA Research Team
Raj Sinha*
Head of EEMEA equity research
HSBC Bank Middle East Limited, Dubai
+971 4 423 6932
raj.sinha@hsbc.com
Equities
Saudi Arabia
July 2014
Ammash Aljuraid*
Analyst
HSBC Saudi Arabia Limited
+966 11 299 2105
ammashaljuraid@hsbc.com
Sriharsha Pappu*
Analyst
+971 4 423 6924
sriharsha.pappu@hsbc.com
Sagar Kumar*
Analyst
+966 11 299 2104
sagar.kumar@hsbc.com
Vikram Viswanathan*
Analyst
+971 4 423 6931
vikramviswanathan@hsbc.com
Yazeed M Alturki*
Analyst
+966 11 299 2260
yazeedmalturki@hsbc.com
Nicholas Paton*
Analyst
+971 4423 6923
nicholas.paton@hsbc.com
Telecom
Herve Drouet*
Analyst
HSBC Bank Plc
+44 20 7991 6827
herve.drouet@hsbcib.com
Simon Williams
Chief Economist, Middle East and North Africa
+971 4 423 6925
simon.williams@hsbc.com
Rana Nasser
Senior Economist, Middle East and North Africa
+971 4423 6928
razan.nasser@hsbc.com
Egypt
Shirin Panicker*
Analyst
HSBC Securities, Egypt, S.A.E.
+202 2529 8439
shirinpanicker@hsbc.com
Saudi Arabia
A guide to the market
Equities
United Arab Emirates

Aybek Islamov*
Analyst
+971 4 423 6921
aybek.islamov@hsbcib.com
Saudi Arabia
Saudi Arabia
Patrick Gaffney*, CFA
Analyst
+966 11 299 2100
patrickgaffney@hsbc.com
After moves towards increased accessibility over the past seven years, the Saudi Arabian
cabinet has now authorised the Capital Market Authority to allow foreign institutions to trade
stocks on the Saudi stock market, paving the way for potentially a complete opening of the
market in 2015
We believe valuations should see a positive effect from the potential inclusion of the stocks
in various equity indices, which could follow soon after the opening of the market
Oilfield services
Peter Hitchens*
Analyst
HSBC Bank plc
+44 20 7991 6822
peter.hitchens@hsbcib.com
In this report we provide a macro overview of the market, and look at this new opportunity
from an equity strategy, industry sector and stock perspective
Utilities
Levent Bayar*
Analyst
HSBC Yatirim Menkul Degerler A.S.
+90 212 3764617
leventbayar@hsbc.com.tr
Equity Strategy
John Lomax*
Head of Equity Strategy, GEMs
HSBC Bank plc, London
+44 20 7992 3712
john.lomax@hsbcib.com
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations.
By the MENA Research Team
Issuer of report: HSBC Bank Middle East Limited, Dubai
July 2014
Disclosures and Disclaimer This report must be read with the disclosures and analyst
certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
Equities
Saudi Arabia
July 2014
abc
Summary
Middle Eastern markets continue to be a focus for global investors with the announcement from the Saudi
Capital Market Authority that its equity markets could open to foreign investors in the first half of 2015.
Should this occur, we would expect Saudi stocks to become eligible for admission to global benchmark
indices, as such implying significant fund inflows both from active funds tracking FTSE, MSCI and other
indices as well as from the passive funds. In this report we provide a guide to the structural drivers in the
key equity sectors and details of 44 stocks we cover, and we include profiles on an additional 17 stocks
with interesting profiles but lower liquidity. We have also provided the views of our Economics, Equity
Strategy and Equity Quant teams.
Saudi Arabia's oil-funded expansionary fiscal stance will remain the prime driver of growth in the country,
with current and capital spending set to rise from last year's record high. Longer-term, Saudi's demographics
look attractive with 60% of the population under the age of 30 and a middle class set to grow from less than
20m today to 40m by 2050 (OECD). Furthermore, the local stock market is well-established, with a healthy
return of 120% since 2004, buoyed by rising oil prices and a GDP that has averaged 6.4% per annum, albeit
with a high level of volatility due to retail investors representing 90% of volumes.
In Saudi Arabia, both the cyclical and secular narratives remain attractive, in our view, with the
announcement regarding the opening of market to foreign investors acting as an additional catalyst. The
obstacles however relate more to valuations and more challenging bottom-up stock selection.
Nevertheless, from an equity strategy perspective we continue to favour an off-benchmark exposure,
emphasising the petrochemical sector as a whole as well as selected consumer and telecom stocks. We are
also positive on the banks sector in the Kingdom again from an equity strategy perspective.
We see significant advantages in many of the sectors in the Kingdom, most of which are difficult to
replicate. Saudi banks have access to one of the cheapest source of funds from low interest deposits while
the vast energy resources of the Kingdom should help industrials to get cheap electricity and fuel.
However petrochemical and fertiliser companies benefit the most as they have access to one the cheapest
sources of feedstock globally. We also see strong growth potential for Saudi consumer-facing companies
as they gain from Saudiasation (moves that encourage employers to hire more Saudis) and employment
growth in the Kingdom. On the other hand telecom companies should see a growth rate that is among the
highest in the world in data usage as other forms of entertainment are limited in the Kingdom.
Since 2007 the market has been open for investment for citizens of the Gulf Cooperation Council (GCC)
and since 2008 it has been accessible to non-GCC investors via swap agreements. A formal opening to
non-GCC investors would carry a much more significant impact from direct investment and the potential
inclusion or upgrade in equity market indices. Should Saudi Arabia be admitted to the EM indices we
estimate that it would constitute 4% of the MSCI EM index.
abc
Equities
Saudi Arabia
July 2014
HSBC Saudi Arabia coverage

Company
Ticker
Abdullah Al-Khodari
Abdullah Al Othaim
Advanced Petro Chem.
Al Mouwasat Medical
Alinma Bank
Almarai
Alrajhi Banking
Arab National Bank
Astra Industrial
Banque Saudi Fransi
Dallah Healthcare
Dar Al Arkan
Etihad Etisalat(Mobily)
Fawaz Alhokair
Herfy Food Services
Jabal Omar
Jarir Marketing
Maaden
Methanol Chemicals
NIC (Tasnee)
National Medical Care
National Petrochemical
Qassim Cement
PetroRabigh
Riyad Bank
Sahara Petrochemical
Samba Financial Group
Saudi Airlines Catering
Saudi Arabian Amiantit
Saudi Arabian Fertilizer
Saudi Basic Industries
Saudi Cement Company
Saudi Electricity Co.
Saudi Industrial Invst.
Saudi International Petro
Saudi Kayan
Saudi Pharmaceutical
Saudi Real Estate
Saudi Steel Pipes
Saudi Telecom Co.
Savola
Yamamah Cement
Yanbu Cement
Yanbu Petrochemical
Zamil Industries
1330.SE
4001.SE
2330.SE
4002.SE
1150.SE
2280.SE
1120.SE
1080.SE
1212.SE
1050.SE
4004.SE
4300.SE
7020.SE
4240.SE
6002.SE
4250.SE
4190.SE
1211.SE
2001.SE
2060.SE
4005.SE
2002.SE
3040.SE
2380.SE
1010.SE
2260.SE
1090.SE
6004.SE
2160.SE
2020.SE
2010.SE
3030.SE
5110.SE
2250.SE
2310.SE
2350.SE
2070.SE
4020.SE
1320.SE
7010.SE
2050.SE
3020.SE
3060.SE
2290.SE
2240.SE
Rating
MCap
(USDm)
CP
TP
OW
N
N (V)
OW
N
N
N
OW
N
N
OW
N
N
N
N
N
OW
N
N (V)
N
N
N (V)
N
OW
N
N
OW
OW
N
OW
OW
OW
N
OW
N
N
N
N
N
OW
N
N
N
N
N
722
1,302
2,160
1,443
7,939
11,678
29,354
7,759
947
10,766
1,309
3,916
17,853
6,019
1,287
13,133
4,799
9,175
531
6,349
879
4,402
2,328
7,852
14,678
2,761
13,438
4,236
557
14,264
98,784
4,508
17,997
4,487
3,500
6,039
1,529
1,389
480
38,394
11,283
3,334
3,087
10,501
972
51.00
108.50
49.40
108.25
19.85
73.00
67.75
29.10
47.90
33.50
104.00
13.60
86.96
107.50
104.50
53.00
200.00
37.20
16.50
35.60
73.50
34.40
97.00
33.62
18.35
23.60
42.00
193.75
18.10
160.50
123.50
110.50
16.20
37.40
35.80
15.10
47.80
43.40
35.30
72.00
79.25
61.75
73.50
70.02
60.75
44.00
82.00
45.00
126.00
21.30
67.00
74.00
37.00
63.00
37.00
115.00
14.00
98.00
90.50
107.86
47.00
237.00
38.00
16.00
35.00
78.00
28.00
101.00
45.00
20.40
23.00
55.00
186.00
16.40
176.00
130.00
130.00
15.90
41.00
34.00
16.00
47.08
40.00
37.50
71.00
74.00
70.00
78.00
77.00
48.00
Source: Thomson Reuters Datastream, HSBC estimates Note: Closing price as on 22 Jul 2014
_____ PE ______
2013 2014e 2015e
42.1
25.4
14.5
26.9
29.3
29.2
14.8
11.5
14.0
16.8
35.9
21.6
10.0
36.5
25.2
0.0
27.6
10.6
27.6
21.6
35.6
0.0
14.9
82.0
13.9
17.9
11.2
30.4
20.6
13.2
14.7
15.0
22.2
23.6
21.2
0.0
21.2
29.0
21.0
13.9
24.8
15.1
14.1
14.9
15.5
28.2
19.5
15.8
25.9
24.5
25.0
14.2
10.0
11.4
13.2
31.0
15.5
9.8
28.6
23.2
40.9
23.8
7.8
14.8
11.5
28.8
14.3
14.6
12.1
12.9
14.4
10.5
27.4
12.5
15.4
11.7
14.8
20.4
10.4
15.9
13.9
17.7
31.9
15.5
12.1
22.7
16.4
14.1
12.5
13.6
17.6
17.1
15.9
20.2
21.5
18.0
13.4
9.1
9.3
12.4
25.1
12.6
9.6
23.0
20.6
40.6
20.4
6.5
16.1
11.7
25.3
15.2
16.7
8.6
11.8
13.8
9.7
22.2
10.7
12.9
11.6
13.3
17.7
10.9
14.4
13.2
15.1
29.7
12.9
11.6
18.7
18.0
16.7
12.6
12.6
_____ EV/EBITDA_______
2013
2014e
2015e
16.2
16.4
10.5
21.2
NM
16.7
NM
NM
19.3
NM
27.0
17.5
8.3
30.7
20.4
0.0
27.2
26.5
10.6
11.4
26.0
35.0
11.4
26.7
NM
17.1
NM
26.7
8.8
11.7
8.3
12.6
9.9
35.2
11.5
20.5
12.4
26.8
14.4
7.2
12.8
10.5
11.3
10.6
11.3
13.7
12.8
10.8
19.4
NM
14.5
NM
NM
13.6
NM
22.7
13.5
7.9
22.6
18.0
39.6
23.0
37.7
8.1
8.1
22.5
11.2
11.1
10.2
NM
12.2
NM
23.1
7.6
13.6
7.1
12.3
10.4
11.1
9.1
10.6
11.0
23.6
11.9
6.7
11.2
10.8
10.7
9.4
10.0
11.1
11.4
10.7
14.5
NM
12.2
NM
NM
9.8
NM
18.7
11.5
7.5
17.2
16.0
35.1
19.3
21.4
8.0
7.9
19.5
10.8
12.7
7.6
NM
9.7
NM
18.6
7.2
11.3
6.8
11.2
10.8
10.8
8.1
9.8
9.3
21.9
10.0
6.2
9.6
11.5
12.4
9.4
9.0
________ RoE __________

2013
2014e
2015e
8.1%
25.8%
25.9%
24.4%
6.0%
17.0%
21.6%
14.2%
13.5%
10.7%
11.9%
4.1%
29.8%
36.1%
34.1%
-0.4%
59.3%
17.2%
4.6%
9.2%
13.0%
-1.6%
29.4%
4.1%
12.5%
10.3%
14.0%
47.1%
6.5%
41.1%
16.7%
35.3%
5.5%
11.4%
10.9%
-2.4%
8.0%
5.5%
10.6%
19.2%
18.9%
22.2%
25.0%
18.9%
15.4%
11.4%
28.8%
22.2%
22.5%
6.9%
16.6%
20.6%
14.8%
15.9%
12.5%
12.9%
5.4%
26.9%
35.5%
32.4%
12.6%
58.6%
22.0%
8.3%
16.6%
13.8%
25.3%
29.7%
25.0%
12.8%
12.0%
13.7%
47.4%
10.6%
32.7%
19.2%
35.3%
5.7%
23.8%
13.8%
11.0%
8.5%
4.9%
14.0%
19.9%
18.4%
19.4%
24.9%
20.4%
16.1%
16.3%
29.5%
21.1%
26.1%
7.3%
20.9%
20.1%
14.9%
17.9%
12.0%
14.6%
6.4%
24.8%
36.8%
32.1%
11.3%
57.4%
25.8%
7.4%
15.2%
15.1%
20.6%
25.6%
29.8%
13.3%
11.8%
13.6%
52.5%
12.2%
39.7%
17.6%
38.7%
6.2%
20.1%
14.3%
10.4%
9.8%
5.3%
16.4%
18.9%
20.9%
17.6%
20.7%
19.5%
16.2%
Perf.
YTD
53.5%
79.4%
28.0%
17.5%
0.0%
37.3%
0.0%
0.0%
-6.3%
0.0%
52.3%
40.9%
2.9%
53.8%
31.2%
71.2%
26.5%
17.7%
7.1%
7.0%
35.3%
30.3%
10.1%
33.3%
0.0%
22.8%
0.0%
34.8%
16.8%
2.4%
13.4%
8.6%
19.2%
21.5%
18.0%
-3.4%
12.3%
27.6%
-3.9%
31.5%
31.2%
8.3%
10.8%
-2.9%
42.4%
abc
Equities
Saudi Arabia
July 2014
Contents
Saudi to open its equity
market
Equity Market Strategy
10
Economics
16
Sectors & companies
17
Banks
19
Arab National Bank
23
Banque Saudi Fransi
26
Riyad Bank
29
32
Alrajhi Banking & Investment
35
Alinma
38
Bank AlBilad
41
Bank AlJazira
43
Saudi Hollandi Bank
45
Saudi Investment Bank
47
Chemicals & fertilisers
49
Advanced Petrochemical
57
Methanol Chemicals Co (Chemanol)
60
Saudi Basic Industries Co (SABIC)
63
National Industrializatio (Tasnee (NIC))
66
Saudi Industrial Investment (SIIG)
70
National Petrochemical Company (Petrochem)
73
Yansab
76
Kayan
79
Saudi International Petro (Sipchem)
82
Rabigh Refining and Petro (PetroRabigh)
85
Maaden
89
Saudi Arabian Fertiliser Company (SAFCO)
92
Cement & construction
95
Yamamah Cement Company
100
Saudi Cement Company (SACCO)
103
Qassim Cement
106
Yanbu Cement
109
Abdullah A. M. Al-Khodari Sons
112
Saudi Arabian Amiantit Co.
115
Saudi Steel Pipes
118
Zamil Industries
121
Arabian Pipes Co.
124
Middle East Specialized

Cables Co.
126
Saudi Cable Co.
128
Saudi Paper Manufacturing

Company
130
abc
Equities
Saudi Arabia
July 2014
United Wire Factories

Company
Real Estate
132
Consumers
135
203
Dar Al Arkan
208
Jabal Omar
211
Abdullah Al Othaim Markets
138
Saudi Real Estate Co.
214
Almarai
141
Emaar Economic City
217
Fawaz Abdulaziz Alhokair
144
Insurance
Jarir Marketing Co.
147
Herfy Food Services
150
The Mediterranean & Gulf Insurance & Reinsurance Co

(Medgulf)
222
Savola
153
156
Al Khaleej Training & Education
159
Al Tayyar Travel Group
161
Budget (United International Transportation Co.)
219
The Company for Cooperative Insurance (Tawuniya)
224
Malath Cooperative Insurance & Reinsurance Co

(Malath)
226
Telecoms
229
Etihad Etisalat (Mobily)
233
163
Saudi Telecom Company
236
eXtra (United Electronics Co.)
165
Zain KSA
239
Farm Superstores (Saudi Marketing Co.)
167
Halwani Brothers
169
Saudia Dairy & Foodstuff Company
171
Saudi Automotive Services Co.
173
Saudi Ceramic Co.
175
Saudi Fisheries Co.
177
Shaker (Al Hassan Ghazi Ibrahim Shaker Co)
179
Healthcare
181
Astra Industrials Group
185
Dallah Healthcare
188
Al Mouwasat Medical Services Co
191
National Medical Care Co (NMCC)
194
Saudi Pharmaceuticals (SPIMACO)
197
Al Hammadi Dev. & Investment Co.
200
Utilities
Saudi Electricity Company (SEC)
241
244
Disclosure appendix
249
Disclaimer
252
abc
Equities
Saudi Arabia
July 2014
Saudi to open its equity

market
Saudi stock market to open in
1H 2015
Saudi Arabias authorities announced on Tuesday,
22 July 2014, their plan to open the country's
listed stock market to foreign investors in the first
half of 2015. This is the first time the Saudi
authorities are expected to allow foreign
institutional investors to directly trade equities in
the Tadawul, without restrictions. Since 2008, the
Kingdom has only allowed foreign investors
indirect access to the market through swaps and
p-notes and investors needed AUM of at least
USD 5bn to be considered.
Next steps for the Saudi authorities

The Capital Market Authority has been given
scope to complete and publish the regulatory
requirements over the next 30 days
Investors and Authorised Participants will
have the opportunity to provide feedback in
the following 90 days.
Market consultations to commence
flow; clearing and settlement (T+0); custody and

transferability with respect to the needs and
requirements of global investors.
Potential global index

benchmark impact
Given the uncertainty regarding the potential
market classification of Saudi Arabia; Developed,
Emerging or Frontier, in the tables which follow,
we simulate the potential impact to MSCI indices,
on the basis of the following:
1)
Saudi is classified as an Emerging Market
2)
Saudi is classified as a Frontier Market
Vijay Sumon*
Head of Indexation
HSBC Bank plc
+44 20 7991 6839
vijay.sumon@hsbcib.com
Joaquim de Lima *
Head of Equity Quantitative
Research
HSBC Bank plc
+44 20 7991 6836
joaquim.delima@hsbcib.com
*Employed by a non-US affiliate
of HSBC Securities (USA) Inc,
and is not registered/ qualified
pursuant to FINRA regulations
Scenario analysis
In our analysis, we assume the following: the
current domestic inclusion factor is equivalent to
the investable free float for Saudi stocks; we
apply minimum size criteria of USD1.4bn at the
company level. Using these criteria we estimate
the new opportunity set for Saudi Arabia will
consist of 45 stocks.
Index providers are expected to commence

consultations on country / market classifications
for the Saudi market based on the following
criteria: openness to foreign ownership; ease of
capital inflows and outflows; efficiency of the
operational framework and stability of the
institutional framework. In terms of market
accessibility, factors that will need to be assessed
will include: foreign ownership limits; equal
rights to foreign investors; market regulations;
competitive landscape of brokers; information
abc
Equities
Saudi Arabia
July 2014
Saudi as an Emerging Market
We would expect China, South Korea, Taiwan and

Brazil to be the most negatively impacted in terms of
weight changes and likely to see decreases of
between 49-78 basis points individually.
We now examine, in detail, the potential impact

on investors benchmarked to MSCI EM in the
event of Saudi being classified as an Emerging
Market. In what follows, we assume all passive
funds will rebalance fully to match the new
benchmark.
In terms of regions, we believe EM Asia is set to

be the most negatively impacted with a decrease
of 260 basis points, followed by Latam with a
decrease of 80 basis points whilst we would
expect EMEA to experience an increase of 350
basis points.
Impact of Saudi entering MSCI EM

Country and Regional impact
We find the Saudi market would account for 4%

in terms of weight in MSCI EM and potentially be
the ninth largest country in terms of weighting.
Table 1: Simulated MSCI Emerging Market regional indices + Saudi Arabia

Region
_______Current EM Index_______
Number of stocks
Weight %
____Potential EM regional Indices + Saudi Arabia____

Number of stocks
Weight %
Weight change %
Net flow USDm
Asia
EMEA
Latam
535
159
140
62.2%
18.1%
19.7%
535
204
140
59.6%
21.6%
18.9%
-2.6%
3.5%
-0.8%
-5,480
7,215
-1,735
Total
834
100%
879
100%
0.0%
Source: MSCI, HSBC estimates. Data as of 21 July 2014
Table 2: Simulated MSCI Emerging Market country indices + Saudi Arabia

Country
______ Current EM Index______

Number of stocks
Weight %
______Potential EM country Indices + Saudi Arabia ______

Number of stocks
Weight %
Weight change % Net flow USDm
Saudi Arabia
Egypt
Hungary
Czech Republic
Peru
Qatar
UAE
Greece
Philippines
Colombia
Chile
Poland
Turkey
Thailand
Indonesia
Malaysia
Russia
Mexico
India
South Africa
Brazil
Taiwan
Korea
China
0
4
3
3
3
10
9
10
20
14
20
23
25
29
30
43
22
30
68
50
73
101
103
141
0.0%
0.2%
0.2%
0.2%
0.4%
0.5%
0.5%
0.7%
1.0%
1.0%
1.5%
1.6%
1.8%
2.3%
2.7%
3.9%
4.9%
5.2%
6.6%
7.5%
11.5%
12.1%
15.2%
18.4%
45
4
3
3
3
10
9
10
20
14
20
23
25
29
30
43
22
30
68
50
73
101
103
141
4.2%
0.2%
0.2%
0.2%
0.4%
0.4%
0.5%
0.7%
0.9%
1.0%
1.4%
1.6%
1.7%
2.2%
2.6%
3.7%
4.6%
5.0%
6.3%
7.2%
11.0%
11.6%
14.6%
17.7%
4.2%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
-0.1%
-0.1%
-0.1%
-0.1%
-0.1%
-0.2%
-0.2%
-0.2%
-0.3%
-0.3%
-0.5%
-0.5%
-0.6%
-0.8%
8,808
-18
-18
-19
-38
-41
-47
-62
-86
-90
-130
-143
-155
-201
-235
-342
-428
-461
-584
-661
-1,016
-1,067
-1,340
-1,624
Total
834
100%
879
100%
0.0%
abc
Equities
Saudi Arabia
July 2014
Table 3: Simulated MSCI Emerging Market sectors + Saudi Arabia

Sector
Number of
Weight %
stocks
____Potential EM sectors + Saudi Arabia____

Number
Weight
Weight
of stocks
%
change %
Net flow
USDm
Materials
Financials
Telecom. Services
Consumer Staples
Health Care
Utilities
Consumer Discretionary
Industrials
Energy
Information Technology
98
210
46
81
30
52
88
112
51
66
8.80%
27.10%
7.10%
8.30%
1.90%
3.60%
9.10%
6.50%
10.50%
17.10%
114
226
49
83
30
53
91
114
53
66
9.90%
27.60%
7.20%
8.20%
1.80%
3.50%
8.90%
6.30%
10.20%
16.40%
1.10%
0.50%
0.20%
-0.10%
-0.10%
-0.10%
-0.20%
-0.20%
-0.40%
-0.70%
2,313
968
338
-262
-164
-143
-453
-353
-735
-1,510
Total
834
100%
879
100%
0.0%
Sector impact
We believe Materials, Financials and Telecoms

sectors could be positively impacted in terms of
weight changes, up 110, 50 and 20 basis points
respectively. We believe these sectors combined
could account for 35 of the 45 Saudi stocks that
could potentially enter MSCI EM.
The Information Technology, Energy, Consumer
Discretionary and Industrial sectors could
potentially experience weight decreases, in the
range of 20-70 basis points.
abc
Equities
Saudi Arabia
July 2014
Table 4: Simulated MSCI Frontier Market regional indices + Saudi Arabia

Region
Number of stocks
Weight %
____Potential EM regional Indices + Saudi Arabia____

Number of stocks
Weight %
Weight change %
Net flow USDm
Asia
EMEA
Latam
34
87
6
14.3%
77.6%
8.1%
34
132
6
5.4%
91.5%
3.1%
-8.9%
14.0%
-5.1%
-99
156
-57
Total
127
100%
172
100%
0.0%
Saudi as a Frontier Market

In this section we detail the potential impact on
investors benchmarked to MSCI FM in the event
of Saudi being classified as a Frontier Market. In
what follows, we assume all passive funds will
rebalance fully to match the new benchmark.
impacted in terms of weight changes and could

see decreases ranging between 5 and 15%.
Regionally, this could lead to potential distortions
in MSCI Frontier Market representation with
EMEA accounting for at almost 92%, Asia
dropping to 5% and Latam at 3%.
Impact of Saudi Arabia entering

Frontier Markets
Country and regional impact
We find the Saudi market would dominate the

MSCI FM index, accounting for 62% in terms of
weight. We would expect Kuwait, Nigeria,
Argentina and Pakistan to be the most negatively
Table 5: Simulated MSCI Frontier Market index + Saudi Arabia
Country
Saudi Arabia
Lithuania
Bulgaria
Ukraine
Serbia
Estonia
Tunisia
Jordan
Mauritius
Bahrain
Croatia
Bangladesh
Sri Lanka
Romania
Lebanon
Slovenia
Vietnam
Kazakhstan
Oman
Kenya
Morocco
Pakistan
Argentina
Nigeria
Kuwait
Total
_______ Current FM index ________

Number of stocks
Weight %
0
2
2
2
2
2
2
3
2
3
3
4
3
4
4
4
12
3
9
5
9
15
6
18
8
0.0%
0.2%
0.2%
0.2%
0.3%
0.4%
0.6%
0.7%
1.2%
1.4%
1.7%
1.8%
1.9%
2.2%
2.2%
2.7%
3.5%
3.7%
4.6%
4.9%
6.1%
7.2%
8.1%
19.6%
24.8%
45
2
2
2
2
2
2
3
2
3
3
4
3
4
4
4
12
3
9
5
9
15
6
18
8
62.2%
0.1%
0.1%
0.1%
0.1%
0.2%
0.2%
0.3%
0.5%
0.5%
0.6%
0.7%
0.7%
0.8%
0.8%
1.0%
1.3%
1.4%
1.7%
1.9%
2.3%
2.7%
3.1%
7.4%
9.4%
62.2%
-0.1%
-0.1%
-0.1%
-0.2%
-0.3%
-0.3%
-0.5%
-0.8%
-0.8%
-1.1%
-1.1%
-1.2%
-1.4%
-1.4%
-1.7%
-2.2%
-2.3%
-2.8%
-3.1%
-3.8%
-4.5%
-5.1%
-12.2%
-15.4%
695
-1
-1
-2
-2
-3
-4
-5
-9
-9
-12
-12
-13
-15
-15
-19
-24
-26
-32
-34
-42
-50
-57
-137
-172
127
100%
172
100%
0.0%
___________New FM Index + Saudi Arabia ___________

Number of stocks
Weight %
Weight change % Net flow USDm
abc
Equities
Saudi Arabia
July 2014
Table 6: Simulated MSCI Frontier Market sectors + Saudi Arabia

Sector
_______Current FM Index_______
Number of
Weight %
stocks
____Potential FM sectors + Saudi Arabia____

Number of
Weight
Weight change
stocks
%
%
Net flow
USDm
Materials
Utilities
Information Technology
Industrials
Health Care
Telecom. Services
Consumer Staples
Energy
Financials
15
3
2
0
5
3
14
11
16
58
5.70%
0.50%
0.40%
0.00%
3.40%
2.70%
14.50%
10.50%
12.10%
50.10%
15
3
2
0
5
3
14
11
16
58
24.00%
2.70%
1.40%
0.00%
2.90%
1.00%
12.30%
7.30%
5.90%
42.60%
18.30%
2.10%
1.00%
0.00%
-0.60%
-1.70%
-2.20%
-3.20%
-6.20%
-7.50%
204
24
11
0
-6
-19
-25
-36
-69
-84
Total
127
100%
127
100%
0.0%
Sector impacts
We believe the Materials and Consumer

Discretionary sectors could be positively
impacted in terms of weight changes, up 18%
and 2% respectively.
Financials, Energy and Consumer Staple could
experience the largest negative impacts with
potential weight decreases of between 3 and 7%.
abc
Equities
Saudi Arabia
July 2014
Equity Market Strategy

Saudi Arabia has a strong cyclical and secular position
Prospective market liberalisation should provide an additional
catalyst
Prefer petrochemicals and selected consumer, telecoms and
bank exposure
For EM and FM investors, we

recommend an off-benchmark
exposure to Saudi Arabia
In Saudi Arabia, both the cyclical and secular
narratives remain attractive. The obstacles relate
more to valuations and more challenging bottomup stock selection. Nevertheless, we continue to
favour an off-benchmark exposure, emphasising
the petrochemical sector as a whole as well as
selected consumer and telecom stocks. We are also
positive on the bank sector.
The long-term, secular dynamic in Saudi Arabia, is
grounded in demographics and middle class growth
(see Frontier Market Equity Strategy: Frontier
markets and the rise in middle class spending,
23 July 2014). The total middle class population is
forecast to grow from less than 20m today to 40m
by 2050 (OECD). This would be the fourth-largest
middle class population in the frontier index.
Simon Williams, our Chief Middle Eastern
Economist, remains upbeat on the Kingdoms nearterm economic prospects, and continues to look for
strong growth in domestic demand, underpinned by
high oil receipts and two more years of fiscal and
current account surplus.
10
The governments oil-funded expansionary fiscal

stance will remain the prime driver of growth, with
current and capital spending set to rise from last
years record high. The government will also be a
prime driver of a raft of other large industrial and
infrastructure development projects (such as the
Riyadh metro) which are state sponsored but not
directly state financed.
With inflation low and the dollar peg in place, we
also expect the Saudi Arabian Monetary Agencys
(SAMAs) monetary stance to remain loose.
In aggregate, the equity market is not very
expensive, with the PE relative (compared with
GEM) trading a little above its five-year history.
However, neither is it very cheap, and stock
selection is becoming more complicated.
In the domestically-focussed part of the market we
like selected consumer, telecom and banks stocks.
For the consumer sector, sales growth should
continue to rebound this year. In aggregate
Saudisation initiatives (policies favouring the
employment of locals) should ultimately help the
sector by enhancing purchasing power. The
undertow from the long-term secular story works in
the sectors favour. The impediment is that the
discount to the peer group has closed, so there is
less valuation support. The telecoms sector is
another way to play the theme.
John Lomax*
Head of Global Emerging
Market Equity Strategy
HSBC Bank plc
+44 20 7992 3712
Kishore Muktinutalapati*
Associate
Bangalore
abc
Equities
Saudi Arabia
July 2014
The case for the banks is also slowly coming into

view. The first rise in US interest rates, which
positively impacts them, is no longer extremely
distant (Q3 next year in the view of HSBCs US
economist). Sectoral earnings in any case should
pick up on the back of falling loan loss provisions
and domestic macro is supportive. Valuations are
looking increasingly attractive.
The petrochemical sector should benefit from both
demand and supply support. Chinese polymer
demand should receive support from the ongoing
strength of the Chinese economy. Unlike, other parts
of the global material sector, Saudi petrochemicals
will not be negatively impacted by the rebalancing
of the Chinese economy towards consumption and
away from infrastructure spending since packaging
and autos are the key demand drivers. On the supply
side, the developing supply vacuum should allow
room for margin expansion from current levels.
Dividend yield, which has scope to be enhanced by
these developments, is an additional source of
sectoral support.
Saudi Arabias Equity Market

The Saudi equity market has performed strongly
over the last 10 years. The main index, the Tadawul
All-Share Index (TASI), has returned a healthy
121% since 2004, buoyed by rising oil prices and
GDP growth that has averaged 6.4% per annum.
However, the volatility has been significant in a
market with over 90% of trading volumes
accounted for by Saudi retail investors. The TASI
returned a 720% from early 2002 to February 2006,
but investors who bought at the peak in February
2006 have lost 53%, even though the market has
returned 95% since early 2009. The market has
been open for investment since 2007 for citizens of
the nations within the Gulf Co-operation Council
(which also includes the UAE, Kuwait, Qatar,
Bahrain and Oman). Since 2008, non-GCC
investors have been able to access the market via
swap agreements.
The Saudi equity market tends to trade at a
premium to the MSCI emerging markets index,
reflecting its vast hydrocarbon wealth and one of
the most attractive demographic profiles globally,
including a very young population and a labour
force growing at nearly 3% per annum. The Saudi
bourse, the largest in the Middle East, is open for
trading in equities between 11.00am and 3.30pm
(one session) Sunday through Thursday.
164 stocks are listed on the Tadawul exchange.
SABIC and Saudi Telecom both account for c25%
of the Tadawul All Share Index, with the top 5
names representing c38% of the market. The top 10
names account for about 52% of the index total
market capitalization, and have an average free float
of about 30%. This means that the Saudi market is
more diversified than most other regional exchanges
but it is still is fairly concentrated by developedmarket standards. The materials sector (which
includes petrochemical companies) accounts for
34.6% of the market, followed by a 33.8% weight
for Financials by market capitalisation.
11
abc
Equities
Saudi Arabia
July 2014
Tadawul All Share price index
Tadawul trading volumes
4.0
6000
3.5
5000
3.0
4000
2.5
3000
2.0
2000
1.5
1.0
1000
0.5
0
01 02 03 04 05 06 07 08 09 10 11 12 13 14
0.0
07
TADAWUL All Share Index (USD)

Source: Tadawul, Thomson Reuters Da tastream
The Saudi market has exhibited a low correlation to

global equity benchmarks, partly because the market
is currently closed for direct foreign investment.
Non-GCC parties can only invest in Saudi equities
through swap contracts and via a limited selection of
exchange traded funds. Several local Saudi
brokerage firms offer swap contracts to international
investors. These contracts enable the investor to
Sector composition of TADAWUL All Share index
Source: Tadawul, Thomson Reuters Da tastream, HSBC
12
09
10
11
12
13
Tadawul Index 6m ADTV (USDbn)
14
Source: Tadawul, Thomson Reuters Da tastream
The Saudi equity market is one of the most heavily

traded in the emerging markets space, with average
daily turnover at USD1.4bn in 2013 and USD2.5bn
currently. At times, the market turnover has been
higher than the combined turnover in all other
CEEMEA equity markets, even though volumes
are still far below the market peak in 2005/06. The
ratio of market capitalisation to GDP, at about
51%, is decent by emerging-market standards.
Sector
Materials
Financials
Telecommunication Services
Consumer Staples
Industrials
Utilities
Energy
Health Care
Total
08
obtain economic exposure while the legal ownership

remains with a Saudi-registered entity.
Market liberalisation
According to Reuters (Saudi Arabia prepares to
open $530 billion bourse to foreigners, 22 July
2014), the Saudi Arabian cabinet authorized the
Capital Market Authority (CMA) at a time it sees
as appropriate to allow foreign financial
institutions to buy and sell stocks on the Saudi
stock market, according to rules to be laid down by
the CMA.
Major stocks in TADAWUL All Share index
Weight (%)
34.6%
33.8%
11.0%
5.5%
4.5%
3.9%
3.6%
2.1%
1.0%
100.0%
Rank
1
2
3
4
5
Top 5
6
7
8
9
10
Top 6-10
Stock Name
Saudi Basic Industries
Saudi Telecom
Al Rajhi Bank
Kingdom Holding
Saudi Electricity
Etihad Etisalat Co.
Riyad Bank
Saudi Arabia Frtz.
The Saudi British Bk.
Source: Tadawul, Thomson Reuters Da tastream, HSBC
Weight (%)
17.5%
7.1%
5.4%
4.5%
3.4%
37.8%
3.2%
2.7%
2.7%
2.5%
2.4%
13.5%
abc
Equities
Saudi Arabia
July 2014
If Saudi opens its market to direct foreign

investment, it may potentially be included in the
MSCI Emerging Markets index. According to
Sebastien Lieblich, executive director in the index
research team at MSCI, the index provider would
wait for the changes to be implemented before
consulting investors, with a decision as to whether to
include it as emerging market unlikely to be made
before June 2015. However, should this materialise,
the Saudi market could take up about 4% of the
MSCI EM index. However, adjusted for the foreign
ownership caps, the weight should be lower.
The high turnover of the Saudi market suggests that
it could be a key constituent of this key benchmark.
Inclusion in the MSCI EM (or even Frontiers EM)
index, were it to happen, could be important for at
least two reasons: first, it should allow Saudi to tap
the broad international pool of EM liquidity;
second, it has the potential to stimulate more
efficient behaviour from Saudi equities, allowing
them to better reflect market fundamentals.
Implications for equity markets

Below we examine the possible consequences of the
decision by the Saudi Arabian Capital Markets
Authority (CMA) to allow limited foreign equity
ownership on the Kingdoms Tadawul Exchange.
The results we would expect include a decrease in
the volatility of returns, and the crowding-out of
irrational trading behaviour. This should push prices
to increasingly reflect fundamentals and to move in
line with their intrinsic values.
We believe allowing foreign ownership would
render the Saudi market less volatile, and
consequently more efficient. Additionally, as
investors are given greater insight into companies
decision-making processes, financial disclosure
and corporate transparency should also improve
while foreign investment, we think, will also bring
additional analyst coverage to the regions
equities, thereby improving the quality of
information available.
The CMA opened Saudi Arabias stock exchange to

limited foreign investment in late 2008. Nonnationals were given the right to trade shares listed
on the exchange by entering into swap agreements.
We expect market efficiency to have improved
since this liberalisation process. However, given the
high transaction costs associated with this indirect
trading mechanism, we believe market efficiency
would further improve once direct foreign
ownership is permitted.
Volatility, liquidity and market efficiency
In order to examine market efficiency, we look at

changes in volatility of returns by comparing the
standard deviation of returns for the two-year pre(partial) liberalisation period with that of the
subsequent two-year period. (For more details on
the methodology see Mispriced: CEEMEA equity
projections, 12 December 2011). Changes in
liquidity are examined by measuring average daily
traded volumes (ADTV) and turnover by volume
for the year preceding the (partial) liberalisation
process and comparing them with levels for the
following two-year period. Finally, market
efficiency is measured by investigating the
relationship between current and past returns. A
market is more efficient when current returns
depend less on their previous values.
After limited foreign trading was allowed, the
weekly standard deviation of returns decreased
substantially from 0.056 to 0.030 a 47.3 %
decrease. After December 2008, large spikes in
returns have decreased both in frequency and
intensity. We believe this to be attributable in part to
increased market efficiency as a result of allowing
limited foreign investment. However, the period
around the decrease in volatility coincides with a
time when the CMA greatly increased market
surveillance in an effort to discourage market
manipulation by groups of wealthy investors. This
development may also serve as a partial explanation
for the decrease in volatility.
13
abc
Equities
Saudi Arabia
July 2014
Weekly returns of Tadawul index pre and post partial

liberalisation in December 2008
15%
300%
10%
250%
5%
200%
0%
150%
-5%
100%
-10%
50%
-15%
Pre liberalisation
-20%
Jan-07
Oct-07
Jul-08
Turnover ratios*
Apr-09
Jan-10
1992
Prior to the liberalisation, the Saudi turnover ratio

was much higher than in many developed and
emerging markets, as shown above. We believe this
drop in turnover ratio indicates that herd behaviour
and noise trading in the market decreased after the
liberalisation process.
We calculate a drop in average ADTV from
USD1.77bn in the first period to USD1.07bn after
the liberalisation process. However, we note that
these measures were implemented at the peak of the
2008 financial crisis, so the decrease in ADTV may
be explained by the drying-up of international
liquidity. However, the countrys turnover ratio has
consistently converged towards levels seen in
developed and emerging markets, which leads us to
believe that foreign investments are also responsible
for this drop in liquidity.
When assessing the impact of the liberalisation on
market efficiency, we found current daily returns to
be significantly correlated with past returns during
the two-year period before the liberalisation
process. In the subsequent two-year period,
however, there was a noticeable drop in the
significance level of the coefficients. The table
below summarises these results.
1995
Saudi Arabia
Oct-10
Source: Tadawul, Thomson Reuters Datastream
14
0%
Post liberalisation
1998
2001
2004
DM
2007
EM
2010
GCC
Notes: *Turnover ratio is the total value of shares traded during the period divided by the
average market capitalisation for the period. Source: Tadawul, Thomson Reuters Datastream
After foreign trading was permitted by the

exchange, the test was unable to detect any
significant pattern among daily returns, except for t2, which still influences current returns.
There has clearly been an improvement in the level
of efficiency in the Saudi market since the
liberalisation process took place. We expect further
improvements once direct foreign ownership
is allowed.
TASI market efficiency
Time period
___________ Coefficients ____________

Pre liberalisation Post liberalisation
t-1
t-2
t-3
t-4
t-5
t-6
t-7
** 1% significance level; * 5% significance level
Source: Thomson Reuters Datastream, HSBC
0.073**
-0.047*
0.043*
0.066**
-0.021
-0.042*
0.017
-0.006
0.104**
0.000
-0.041
-0.016
-0.051
0.032
abc
Equities
Saudi Arabia
July 2014
Earnings and valuations

Price/Earnings ratio
Earnings growth and equity performance
28.0x
60%
60%
24.0x
50%
40%
40%
20%
30%
0%
20%
-20%
10%
-40%
20.0x
16.0x
12.0x
-60%
0%
8.0x
06
07
08
09
10
12 month trailing PE
07
11
12
13
14
12 month forward PE
08
09
10
11
12
13
14
12 month forward Earnings growth
y-o-y returns (RHS)
Source: Tadawul, Bloomberg
Price/Sales ratio
Price/Book ratio
6.0x
4.0x
3.5x
5.0x
3.0x
2.5x
4.0x
2.0x
3.0x
1.5x
1.0x
2.0x
08
09
10
11
12 month trailing P/S
08
12
13
14
12 month forward P/S
09
11
12 month trailing PB
Earnings yield
Dividend Yield
12.0%
10
12
13
14
12 month forward PB
5.0%
11.0%
4.5%
10.0%
9.0%
4.0%
8.0%
3.5%
7.0%
3.0%
6.0%
2.5%
5.0%
2.0%
4.0%
06
07
08
09
10
11
12
13
12 month forward Earnings Yield
14
08
09
10
12 month trailing DY
11
12
13
14
12 month forward DY
15
abc
Equities
Saudi Arabia
July 2014
Economics
Slowing, but still strong
We remain upbeat on the Kingdoms near-term
economic prospects, and continue to look for strong
growth in domestic demand, underpinned by high
oil receipts and two more years of fiscal and
current account surplus. The impact that unrest in
Iraq, Libya and Ukraine has had on global energy
prices represents upside risk to this view.
The governments oil-funded expansionary fiscal
stance will remain the prime driver of growth,
with current and capital spending set to rise from
last years record high. The government will also
be a prime driver of a raft of other large industrial
and infrastructure development projects (such as
the Riyadh Metro) which are state sponsored, but
not directly state financed.
With inflation low and the dollar-peg in place, we
also expect SAMAs monetary stance to remain
loose, with funding from domestic sources
enhanced by improving access to global debt and
equity markets. Saudi Arabias demographic
profile 60% of the population are under the age
of 30 will support gains in consumption. With
reserves equivalent to some 90% of GDP and a

public debt at less than 5% of GDP, the Kingdom
is also well placed to weather even a pronounced
increase in regional political risk or prolonged fall
in oil earnings.
In this context, though, we see some signs that the
economy is decelerating with markers of
consumption and investment growth all easing
over the first half of the year. Though driven in
part by the short-term disruption caused by the
expulsion of a large number of expatriates in late
2013, it also marks the Kingdoms increased
fiscal caution as the budget surplus continues to
decline. We see signs that alongside more modest
gains in spending, there is also a greater
commitment to economic liberalisation and
structural reform. In our view, however, the pace
of change as yet lacks the urgency required if the
Kingdoms long-term demand for goods, services
and employment is to be met in an environment of
more modest public spending gains.
Key data and forecasts
GDP (% y-o-y)
Current account (% GDP)
Budget Balance (% GDP)
Trade Balance (% GDP)
CPI (% end year)
Public Debt (% GDP)
External debt (% GDP)
Policy rate (% end year)
USD/SAR (end year)
EUR/SAR (end year)
2008
2009
2010
2011
2012
2013e
2014f
2015f
8.2
24.4
29.8
40.9
9.0
12.1
18.5
1.50
3.75
5.22
2.0
3.5
-5.4
24.6
4.2
14.0
23.2
0.25
3.75
5.40
7.5
13.4
4.4
29.3
5.4
8.5
19.7
0.25
3.75
5.02
8.6
22.8
11.6
36.6
5.3
5.4
16.6
0.25
3.75
4.87
5.8
21.8
13.7
34.0
3.9
3.6
15.8
0.25
3.75
4.94
4.1
17.1
6.4
30.1
3.0
2.7
15.3
0.25
3.75
5.13
4.2
13.4
3.7
26.6
3.5
2.9
14.4
0.25
3.75
4.79
3.9
9.2
2.3
23.7
4.3
3.1
14.1
0.25
3.75
4.68
Source: Saudi Arabia Monetary Agency, Central Department of Statistics and Information (CDSI), HSBC estimates and forecasts
16
Simon Williams
Economist
HSBC Bank Middle East Ltd
+971 4423 6925
Razan Nasser
Economist
+971 4423 6928
Equities
Saudi Arabia
July 2014
abc
Sectors & companies
17
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Equities
Saudi Arabia
July 2014
This page has been left intentionally blank
18
Equities
Saudi Arabia
July 2014
abc
Banks
19
abc
Equities
Saudi Arabia
July 2014
Banks
We do not expect core revenue growth to rise above 10% during
2014e-15e; we factor in a 20bp increase in interest rates in 2015e

and expect core revenue growth to recover to 13% in 2016e
Balance sheets are asset-driven in a market with ample deposit
funding; we estimate banks can sustain 10-15% pa increase in

loans but should also raise collective provisions in the medium term
We have Overweight ratings on Samba (TP SAR55) and ANB (TP
SAR 37), Neutral ratings on Alinma (TP SAR21.3), Alrajhi (TP

SAR74.0), BSF (TP SAR37.0) and Riyad (TP SAR20.4)
Sector view
Core revenue growth will struggle to
recover in 2014e and 2015e
A combination of low interest rates, a cap on loan to
deposit ratios of 85% and the strong capitalisation of
Saudi banks means that the sector will struggle to
substantially improve its core revenue growth in
2014e and 2015e, in our view. Alinma Bank and
Riyad Bank are the exceptions due to faster and
more stable loan growth, mainly as a result of their
surplus capital positions. We forecast sector core
revenues to increase 9% in 2014e and 2015e. Q2
2014 earnings results confirmed our full year
expectation. An increase in interest rates will be a
key driver of improvement. We factor in a 20bp
increase in 2015e and expect Saudi banks core
revenue growth to recover to 13% in 2016e.
20
Saudi banks' y-o-y core revenue* growth: latest trends and

our forecasts
(%)
Alinma
Alrajhi
ANB
BSF
Riyad
Samba
Avg.
Q2 13 Q3 13 Q4 13 Q1 14 2014e 2015e 2016e

12
1
2
(1)
5
(0)
3
15
(2)
4
2
7
4
5
20
2
15
3
12
7
10
15
0
10
12
15
(3)
8
16
4
9
9
9
8
9
15
5
8
9
12
9
9
15
8
10
20
16
16
13
Source: Company data, HSBC estimates; Note: *core revenue = net interest income + fees;
latest core revenue figures for Q2 14 are not out yet
In the meantime, as core revenue growth remains

below 10%, Saudi banks will have to rely
increasingly on other non-interest income, such as
gains on trading and investments, and FX
revenue. These are more volatile sources of
earnings, which dilute earnings quality. As we
illustrate in the next table, the average
contribution from these sources to total revenue
was 9 to 12% over the last six quarters.
Aybek Islamov*
Analyst
HSBC Bank Middle East
+ 971 4423 6921
aybek.islamov@hsbc.com
abc
Equities
Saudi Arabia
July 2014
Contribution of other non-interest income

(FX, trading and investment gains) to total revenue
(%)
Alinma
Alrajhi
ANB
BSF
Riyad
Samba
Average
Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14
1
16
13
9
7
9
9
7
10
15
9
6
14
10
2
9
13
10
12
11
10
3
13
10
9
8
12
9
3
15
12
15
10
6
10
5
10
16
9
11
17
12
Source: company data, HSBC estimates, Q2 14 details are not out yet
Loan growth pipeline remains healthy

As was recently discussed in the initiation report
on GCC construction contractors Ride the next
order wave (17th April 2014, Nicholas Paton et
al), cUSD100bn of projects are still to be awarded
in 2014 in Saudi Arabia. These are concentrated
in the power, transportation, oil & gas, water and
construction sectors of the economy.
Assuming that a quarter of these projects, ie
cUSD25bn, are funded with bank loans, this
translates into an 8-10% increase in the sector
loan book. We estimate that the capitalisation and
liquidity positions of Saudi banks can easily
sustain a 10-15% annual increase in sector loans.
The risk is that contractors may not be getting
paid on time, thereby causing asset quality risks to
banks. In 2013, there was much discussion of the
potential introduction of a new law in Saudi to
enable companies to claim compensation for work
that has not been paid for. If such a law were to be
introduced, it would not only reduce the ratio of
receivables to sales for construction contractors
(which is running north of 120% in Saudi), but
would also give more confidence to investors in
Saudi banks.
Banks need to deal with the structural

deficit in collective provisions
With loan growth remaining in the low teens in
2014, we see increasing pressure on Saudi banks
to improve loan loss reserves. Most banks we
cover tend to write off NPLs immediately against
specific loan loss reserves. Hence, quite often, it is
not the NPL ratio which is indicative of real asset
quality, but the write-offs to loans ratio.
Specific reserves to loan ratios averaged 1.1% in 2013 and were
as high as 2.2% in 2010, at a time of rising impairments
Albilad
Alinma
Alrajhi
ANB
BSF
NCB
Riyad
SABB
Samba
SHB
SIB
Total
2010
2011
2012
2013
4.4%
0.0%
1.0%
2.8%
1.0%
3.4%
1.1%
2.7%
2.6%
2.3%
4.5%
2.2%
4.4%
0.0%
0.9%
2.9%
0.9%
2.8%
0.8%
1.2%
1.9%
2.0%
6.0%
1.8%
n/a
0.2%
1.5%
2.5%
0.7%
2.7%
1.2%
1.1%
1.3%
1.6%
0.6%
1.5%
1.7%
0.4%
0.9%
1.7%
1.1%
1.3%
0.6%
1.1%
1.1%
1.3%
0.5%
1.1%
Source: Company data, HSBC estimates
The problem is that, with a low buffer of portfolio

provisions (also known as collective provisions),
such write-offs require banks to take specific
provision charges which, in turn, dampen earnings
growth. The collective provision reserve works as a
counter-cyclical buffer in the event of unexpected
impairments, absorbing negative earnings shocks.
The table above illustrates that most banks have
reduced their specific reserves to loan ratios over the
last 3 years. In the meantime, collective provision to
loans ratios were generally steady, with the
exceptions of SIB, Samba, and Riyad where this
ratio declined (see table below). However, 5 out of
the 8 banks currently have a collective provision to
loans ratio that is below 1%.
21
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Equities
Saudi Arabia
July 2014
Collective provisions to loans ratio - below 1% for 5 out of

8 banks in 2013 (grey colour coded)
Albilad
Alinma
Alrajhi
ANB
BSF
NCB
Riyad
SABB
Samba*
SHB
SIB
Total
2010
2011
2012
2013
0.5%
0.0%
2.0%
0.4%
0.9%
1.2%
1.0%
0.7%
1.8%
0.9%
1.5%
1.2%
1.7%
0.5%
1.6%
0.6%
0.7%
1.4%
0.9%
1.2%
1.8%
0.8%
1.6%
1.2%
n/a
0.5%
1.3%
0.5%
0.7%
1.5%
0.9%
1.3%
1.6%
0.8%
1.7%
1.1%
2.0%
0.7%
1.3%
0.5%
0.8%
1.3%
0.8%
1.0%
1.3%
0.8%
1.0%
1.1%
Source: Company data, HSBC estimates; Note *Samba does not disclose total collective
provisions. We only include the collective provisions which the company reports in its Tier 2
capital
We therefore think that, even in the absence of

further impairments, banks will need to improve
their collective provision reserves. We model our
cost of risk forecasts accordingly, which we show
in the table below.
Our cost of risk expectations
(bp)
Alinma
Alrajhi
ANB
BSF
Riyad
Samba
Average
2012
49
142
63
46
100
30
72
2013 2014e 2015e 2016e 2017e

66
141
70
88
50
32
74
22
61
110
53
57
50
37
61
67
93
53
58
60
37
61
72
83
58
58
78
46
66
76
88
85
58
91
54
75
Searching for relative value in a

sector with pedestrian EPS growth
While the near-term earnings growth that we
expect for most Saudi banks is somewhat
sluggish, we still see pockets of value, which we
identify on the basis of PEG. As can be seen from
the table below, although both ANB and Samba
are expected to post below-average earnings
growth over the next two years, their valuations
are sufficiently low that they still show up as best
value on a PEG basis. ANB and Samba are our
only OW-rated Saudi banks.
PE and PEG multiples
Alinma
Alrajhi
ANB
BSF
Riyad
Samba
Average
Source: HSBC estimates
PE 2015e
EPS CAGR
13-15e
PEG
21.4
13.4
9.1
12.5
11.8
9.7
12.8
17%
5%
12%
16%
9%
7%
9%
1.3
2.7
0.8
0.9
1.3
1.4
1.4
abc
Equities
Saudi Arabia
July 2014
Arab National Bank

ARNB AB, Price SAR29.1,
Overweight, TP SAR37
Company description
ANBs loan growth may lag the sector this year

at only 8% we expect it to recover to 11% and
14% in 2015e and 2016e, respectively.
Aybek Islamov*
Analyst
+ 971 4423 6921
ANB was established in 1979. Arab Bank (Jordan) is

the majority shareholder, with a 40% stake. In 2000
it was the first bank to offer internet banking services
in Saudi Arabia. The bank provides a full range of
retail and corporate banking services. On our
estimates, it had 8% market share of loans and
deposits, as at March 2014. ANB teamed up with
Dar Al Arkan, the real estate developer, to set up the
Saudi Home Loan Company, in order to gain a
foothold in the housing finance market.
Financials

Investment thesis
Good improvement in core revenue despite
weak loan growth. Recent quarters confirm that
ANB has been able to grow its net interest income

and fees faster than customer loans. This is due to
it optimising its asset mix. In 2012 and 2013,
despite weak loan growth, the loan to asset ratio
continued to improve, reaching 64% in Q4 13, up
from 62% in Q4 11. We expect this trend to
continue and forecast net interest income and fees
to grow by 7% and 11%, respectively, in 2015e.
We estimate ANB can grow its pre-provision
income by 8% in 2014e, and by 10% in 2015e.
Cut in pay-out ratio saves more capital. As
ANB has now rebuilt its capital buffer, we expect

the bank to re-accelerate its loan growth from
2015. ANB reduced its pay-out ratio to 17% in
2013 from 36% in 2012. The cut delivered a
130bp improvement in the capital adequacy ratio,
to 16.3% in Q1 14 from 15% in Q1 13. While
We forecast Arab National Bank to report earnings

of SAR2.9bn (before zakat) in 2014e, an increase of
15% over 2013, on the back of 5% and 7%
increases in non-interest income and net interest
income respectively and a 20% decline in bad asset
charges, generating an ROE of 14.8%. Our earnings
estimates are 11% and 12% above Bloomberg
consensus for 2014e and 2015e respectively.
Valuation
We derive our target prices for Saudi banks using
a residual income methodology, using an inflation
differential model to calculate the cost of equity.
The residual income valuation approach calculates
the fair value of the company as the sum of its
current net asset value and the present value of its
future residual income. The residual income is
measured as an excess return over cost of equity.
To calculate the cost of equity by the inflation
differential method, we assume cost of equity as
the sum of the US risk-free rate (3.0%), the
inflation differential between Saudi Arabia and
the US (2.6%) and the equity risk premium
(5.5%) multiplied by the stock beta (1.0 for Saudi
banks we cover). Our estimated cost of equity for
ANB is 11.1%. Under our research model, for
stocks without a volatility indicator, the Neutral
band is 5 percentage points above and below the
hurdle rate for Saudi stocks of 9.0%. Our target
price of SAR37 implies a potential return of 27%,
23
Equities
Saudi Arabia
July 2014
which is above the Neutral band of 4%-14% for

non-volatile Saudi stocks; therefore, we rate the
stock Neutral. The stock is currently trading at
1.4x 2014e book value, for an ROE of 14.8%.
Potential return equals the percentage difference
between the current share price and the target price,
including the forecast dividend yield when indicated.
We do not include dividend yields in our potential
returns for the Saudi banks, since we use residual
income methodology to value our stocks.
Risks
Key downside risks include:
Downside risks centre on stronger-than-expected

cost of risk as a result of weaker asset quality, as
well as slower loan growth.
24
abc
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Arab National Bank

Financial statements
Year to
Core profitability (% RWAs) and leverage

12/2013a
12/2014e
12/2015e
12/2016e
3,375
1,053
65
616
5,110
-1,994
-627
36
2,525
0
2,525
0
-3
2,522
2,522
3,613
1,194
18
604
5,428
-2,070
-499
42
2,900
0
2,900
0
-3
2,897
2,897
3,860
1,326
0
663
5,848
-2,162
-547
48
3,188
0
3,188
0
-3
3,185
3,185
4,215
1,473
0
719
6,407
-2,258
-671
52
3,530
0
3,530
0
-4
3,526
3,526
18,655
18,655
88,456
28,248
106,373
133,787
137,935
20,425
20,425
95,875
34,762
115,946
139,836
148,853
22,369
22,369
105,963
35,679
127,541
151,966
162,392
24,522
24,522
120,284
36,660
144,121
168,001
181,126
P&L summary (SARm)

Net interest income
Net fees/commissions
Trading profits
Other income
Total income
Operating expense
Bad debt charge
Other
HSBC PBT
Exceptionals
PBT
Taxation
Minorities + preferences
Attributable profit
HSBC attributable profit
Balance sheet summary (SARm)
Ordinary equity
HSBC ordinary equity
Customer loans
Debt securities holdings
Customer deposits
Interest earning assets
Total assets
Capital (%)
RWA (SARm)
Core tier 1
Total tier 1
Total capital
123,778
15.1
15.1
16.0
136,476
15.0
15.0
15.9
148,392
15.1
15.1
15.9
164,996
14.9
14.9
15.6
12/2013a
12/2014e
12/2015e
12/2016e
7.4
5.4
8.8
6.4
6.4
-50.0
10.0
6.2
3.8
7.8
14.9
14.9
36.5
9.5
7.7
4.4
9.8
9.9
9.9
9.9
9.5
9.6
4.4
12.6
10.7
10.7
10.7
9.6
Year-on-year % change
Total income
Operating expense
Pre-provision profit
EPS
HSBC EPS
DPS
NAV (including goodwill)
12/2013a
12/2014e
12/2015e
12/2016e
2.7
0.1
0.5
-1.6
2.5
-0.5
2.1
6.9
13.5
2.8
0.0
0.5
-1.6
2.6
-0.4
2.2
6.7
14.1
2.7
0.0
0.5
-1.5
2.6
-0.4
2.2
6.7
14.2
2.7
0.0
0.5
-1.4
2.6
-0.4
2.3
6.7
14.3
Net interest income

Trading profits
Other income
Operating expense
Bad debt charge
Leverage (x)
Return on average tier 1
Valuation data
Year to
12/2013a
12/2014e
12/2015e
12/2016e
11.5
9.3
1.6
8.3
1.5
10.0
8.7
1.4
6.9
2.0
9.1
7.9
1.3
8.1
2.2
8.3
7.0
1.2
8.1
2.4
PE*
Pre-provision multiple
P/NAV
Equity cash flow yield (%)
Dividend yield (%)
Note: * = Based on HSBC EPS (fully diluted)
Issuer information
Share price
(SAR)29.10
Reuters (Equity)
Market cap (USDm)
Free float (%)
Country
Analyst
Target price
1080.SE
7,804
34
Saudi Arabia
Aybek Islamov
33
31
29
27
25
23
21
19
17
15
2012
2013
Arab National Bank
Ratios (%)
Cost/income ratio
Bad debt charge
Customer loans/deposits
NPL/loan
NPL/RWA
Provision to risk assets/RWA
Net write-off/RWA
Coverage
ROE (including goodwill)
Year to
Bloomberg (Equity)
Market cap (SARm)
Sector
Contact
1
(%) 1
.
8
(SAR)37.00
ARNB AB
26,605
COMMERCIAL BANKS
+9714 423 6921
Price relative
Ratio, growth & per share analysis

Year to
Overweight
39.0
0.7
83.2
1.1
0.8
1.7
1.0
204.7
14.2
38.1
0.5
82.7
1.1
0.8
1.4
0.5
172.0
14.8
37.0
0.5
83.1
1.1
0.8
1.3
0.3
169.7
14.9
35.2
0.6
83.5
1.1
0.8
1.3
0.3
166.1
15.0
2.52
2.52
0.43
18.66
18.66
2.90
2.90
0.58
20.42
20.42
3.18
3.18
0.64
22.37
22.37
3.53
3.53
0.71
24.52
24.52
2014
33
31
29
27
25
23
21
19
17
15
2015
Rel to TADAWUL ALL SHARE INDEX
Source: HSBC, price at close of 22 July 2014
Per share data

EPS reported (fully diluted)
HSBC EPS (fully diluted)
DPS
NAV
25
abc
Equities
Saudi Arabia
July 2014
Banque Saudi Fransi

BSFR AB, Price SAR33.5, N, TP
SAR37
Company description
and 2015e, respectively, and expect the majority

of future loan loss provisions to be directed into
the collective provision reserve.
Aybek Islamov*
Analyst
+ 971 4423 6921
Banque Saudi Fransi established in 1977 is among

the top 5 banks in Saudi Arabian banking sector
by loan market share. It controls 11% of the total
loan market & 9% of assets in Saudi Arabia as of
the end of March 2014. Credit Agricole CIB, the
corporate and investment banking entity of Credit
Agricole Group (ACA FP, Price EUR10.3, OW),
is the largest stakeholder in the bank, with a
31.1% stake, followed by the Government of
Saudi Arabia with a 13.2% stake.
Recovery in fee income growth. The pick-up in off

Banque Saudi Fransi is the leading commercial

bank in KSA serving both national and
international clientele. It provides conventional
and Islamic commercial banking services
including asset management services, credit cards
and corporate banking solutions. It has a fully
owned subsidiary, Saudi Fransi Capital, which
mainly provides investment banking services.
As of December 2013, BSF had a distribution
network of 83 branches across Saudi Arabia with
an employee base of 2,660.
Investment thesis
One-off normalisation in bad asset charge should
lift 2014e ROE to 12.5% from 10.7% last year. We
forecast a 28% drop in bad asset charges in 2014e.

As a result, we expect a sharp improvement in ROE,
to 12.5% in 2014e from 10.7% in 2013. BSF has
made positive progress in terms of portfolio
provisions, increasing them to 0.8% in 2013 from
0.7% in 2012. However, we still think the ratio
will need to improve further from here. We
forecast cost of risk of 57bp and 58bp in 2014e
26
balance sheet business (+17% yoy in 2013) should

lead to better fee growth. We expect BSF to grow its
total fees 9% in 2014e and 8% in 2015e.
Financials
We forecast BSF to report earnings of SAR3.07bn
(before zakat) in 2014e, increasing 27% y-o-y
with ROE of 12.5%. Our earnings estimates are
inline with Bloomberg consensus for 2014e and
6% below consensus for 2015e.
Valuation
future residual income.
BSF is 11.1%. Under our research model, for
hurdle rate for Saudi stocks of 9%. Our target
which is within the Neutral band of 4%-14% for
Equities
Saudi Arabia
July 2014
abc

stock Neutral. The stock is currently trades at 1.6x
2014e book value, for an ROE of 12.5%.
including the forecast dividend yield when
indicated. We do not include dividend yields in our
potential returns for the Saudi banks, since we use
residual income methodology to value our stocks.
Risks
Downside risks centre on further deceleration

in loan growth, largely driven by weak
corporate demand.
Key upside risks include:
Upside risks centre on lower bad asset

charges than we estimate. A 10bp reduction in
cost of risk versus our base case would lead to
an additional 7ppt of EPS growth in 2014e.
27
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Banque Saudi Fransi

Year to

12/2013a
12/2014e
12/2015e
12/2016e
3,363
1,150
106
434
5,053
-1,684
-957
-5
2,406
0
2,406
0
0
2,406
2,406
3,697
1,251
150
428
5,526
-1,776
-688
3
3,066
0
3,066
0
-2
3,064
3,064
4,041
1,350
40
447
5,878
-1,853
-768
4
3,261
0
3,261
0
-2
3,259
3,259
4,981
1,465
0
417
6,863
-1,976
-865
4
4,026
0
4,026
0
-2
4,023
4,023
23,217
23,217
111,307
34,299
131,601
157,803
170,057
25,798
25,798
123,491
38,264
144,761
172,655
185,799
28,543
28,543
137,109
42,823
162,133
190,209
205,918
31,932
31,932
152,722
48,066
180,595
210,788
227,771
P&L summary (SARm)

Net interest income
Trading profits
Other income
Total income
Operating expense
Bad debt charge
Other
HSBC PBT
Exceptionals
PBT
Taxation
Attributable profit
Ordinary equity
Customer loans
Customer deposits
Total assets
Capital (%)
RWA (SARm)
Core tier 1
Total tier 1
Total capital
165,884
13.9
13.9
15.6
183,839
14.0
14.0
15.6
204,086
14.0
14.0
15.4
227,212
14.1
14.1
15.3
12/2013a
12/2014e
12/2015e
12/2016e
0.9
8.5
-2.6
-20.2
-20.2
-66.7
6.1
9.4
5.4
11.3
27.4
27.4
27.4
11.1
6.4
4.3
7.3
6.4
6.4
6.4
10.6
16.8
6.6
21.4
23.5
23.5
23.5
11.9
Total income
Operating expense
EPS
HSBC EPS
DPS
33.3
0.9
84.6
1.3
0.9
1.3
-0.2
146.2
10.7
32.1
0.6
85.3
1.2
0.8
1.4
-0.2
168.0
12.5
31.5
0.6
84.6
1.0
0.7
1.4
-0.2
194.4
12.0
28.8
0.6
84.6
1.1
0.8
1.4
-0.3
176.6
13.3
2.00
2.00
0.16
19.26
19.26
2.54
2.54
0.20
21.40
21.40
2.70
2.70
0.21
23.68
23.68
3.34
3.34
0.26
26.49
26.49
Per share data

DPS
NAV
28
12/2013a
12/2014e
12/2015e
12/2016e
2.1
0.1
0.3
-1.1
2.1
-0.6
1.5
7.1
10.4
2.1
0.1
0.2
-1.0
2.1
-0.4
1.8
7.1
11.9
2.1
0.0
0.2
-1.0
2.1
-0.4
1.7
7.1
11.4
2.3
0.0
0.2
-0.9
2.3
-0.4
1.9
7.1
12.6
Net interest income

Trading profits
Other income
Operating expense
Bad debt charge
Leverage (x)
Valuation data
Year to
12/2013a
12/2014e
12/2015e
12/2016e
16.8
12.0
1.7
3.6
0.5
13.2
10.8
1.6
4.5
0.6
12.4
10.0
1.4
4.6
0.6
10.0
8.3
1.3
6.0
0.8
PE*
P/NAV
Dividend yield (%)
Issuer information
Share price
(SAR) 33.50
Reuters (Equity)
Market cap (USDm)
Free float (%)
Country
Analyst
Target price
1050.SE
10,766
40
Saudi Arabia
Aybek Islamov
36
34
32
30
28
26
24
22
20
18
16
2012
2013
Banque Saudi Fransi
Ratios (%)
Cost/income ratio
Bad debt charge
NPL/loan
NPL/RWA
Net write-off/RWA
Coverage
Year to
Bloomberg (Equity)
Market cap (SARm)
Sector
Contact
8
(%) .
8
(SAR)37.00
BSFR AB
30,737
COMMERCIAL BANKS
+9714 423 6921
Price relative

Year to
Neutral
2014
36
34
32
30
28
26
24
22
20
18
16
2015
abc
Equities
Saudi Arabia
July 2014
Riyad Bank
RIBL AB, Price SAR18.35, Neutral,
TP SAR20.5
Company description
Riyad Bank was established in 1957. It has the
third-largest branch network in Saudi Arabia and
is currently mainly owned by Saudi shareholders.
We estimate it had market share of around 12% in
loans and 11% in deposits as of March 2014.
Riyad bank is engaged in a wide array of retail
and corporate banking services. The bank is
primarily a corporate bank with corporate loans
forming 74% of the total loan book end of Q1
2014. In December 2013, SAMA issued the first
license for real estate financing and lease
financing to Riyad Bank.
Investment thesis
Good growth in core revenue. Stable increases
in the customer loan portfolio provide a good base

for core revenue to grow. Core revenue improved
sequentially in both Q4 13 and Q1 14 and we
forecast growth of 9% in 2014e and 12% in
2015e, which is above the sector averages.
Funding cost optimisation remains a strategic
priority. Riyad Bank has the second highest
funding costs in our coverage (after BSF) at 57bp

as at Q1 14 (peer group average = 40bp). While
funding costs do not appear to be an issue within a
very liquid banking sector and low interest rate
environment, Riyad Bank does need to improve
its collection of demand deposits. The ratio of
demand deposits reduced to 42% in Q1 14, down
from 47% the year before.
Collective provisions too low in view of the

current loan growth. Similar to BSF, we think
Riyad Bank should reconsider the adequacy of its
collective provision reserves, which reduced to
0.8% of gross loans in 2013, from 1% in 2010. In
fact, the size of Riyad Banks collective provision
reserve has not changed since 2010, despite a 23%
increase in the loan book. We forecast cost of risk
of 50bp and 60bp in 2014e and 2015e,
respectively, and, in the absence of large
impairments, expect the bulk of provisions to flow
into the collective provision reserve.
Aybek Islamov*
Analyst
+ 971 4423 6921
Financials
We forecast Riyad bank to report earnings of
SAR4.26bn (before zakat) in 2014e, an increase of
8% over 2013, on the back of 11% and 8% increases
in non-interest income and net interest income
respectively, generating an ROE of 12.8%. Our
earnings estimates are 2% and 1% above Bloomberg
consensus for 2014e and 2015e respectively.
Valuation
inflation differential between Saudi Arabia and the
US (2.6%) and the equity risk premium (5.5%)
multiplied by the stock beta (1.0 for Saudi banks
29
Equities
Saudi Arabia
July 2014
we cover). Our estimated cost of equity for Riyad

bank is 11.1%. Under our research model, for
hurdle rate for Saudi stocks of 9%. Our target price
of SAR20.5 implies a potential return of 12%,
non-volatile Saudi stocks, therefore we rate the
stock as Neutral. The stock is currently trading at
potential returns for the Saudi banks, since we use
Risks
Upside risks centre on stronger loan growth,

exceeding our base case forecast of 13% in
2014e. Also, an increase in the dividend payout ratio would accelerate ROE recovery at
Riyad Bank. The bank currently has a pay-out
ratio of 56%.
Downside risks relate to worse-than-expected
asset quality and a stronger decline in NIM
than we forecast
.
30
abc
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Riyad Bank
Neutral
Year to

12/2013a
12/2014e
12/2015e
12/2016e
4,697
1,821
-4
559
7,074
-2,578
-627
79
3,947
0
3,947
0
0
3,947
3,947
5,058
2,019
0
616
7,693
-2,789
-710
62
4,257
0
4,257
0
0
4,257
4,257
5,692
2,196
0
592
8,479
-2,901
-966
69
4,681
0
4,681
0
0
4,681
4,681
6,704
2,416
0
590
9,710
-3,078
-1,434
76
5,274
0
5,274
0
0
5,274
5,274
32,470
32,470
131,191
43,538
153,200
191,641
205,246
34,170
34,170
146,765
45,179
170,052
208,640
222,464
36,040
36,040
168,437
46,887
195,163
230,632
249,511
38,158
38,158
192,998
48,663
223,621
259,319
280,143
P&L summary (SARm)

Net interest income
Trading profits
Other income
Total income
Operating expense
Bad debt charge
Other
HSBC PBT
Exceptionals
PBT
Taxation
Attributable profit
Ordinary equity
Customer loans
Customer deposits
Total assets
Capital (%)
RWA (SARm)
Core tier 1
Total tier 1
Total capital
204,525
16.6
16.6
17.1
222,820
16.0
16.0
16.4
250,164
15.0
15.0
15.4
281,103
14.1
14.1
14.4
12/2013a
12/2014e
12/2015e
12/2016e
Total income
Operating expense
EPS
HSBC EPS
DPS
4.2
9.7
1.3
13.9
13.9
11.5
5.3
8.7
8.2
9.1
7.8
7.8
7.6
5.2
10.2
4.0
13.8
10.0
10.0
10.0
5.5
14.5
6.1
18.9
12.7
12.7
12.7
5.9
12/2014e
12/2015e
12/2016e
2.4
0.0
0.3
-1.3
2.3
-0.3
2.0
6.1
11.7
2.4
0.0
0.3
-1.3
2.3
-0.3
2.0
6.4
12.0
2.4
0.0
0.3
-1.2
2.4
-0.4
2.0
6.7
12.5
2.5
0.0
0.2
-1.2
2.5
-0.5
2.0
7.2
13.3
Net interest income

Trading profits
Other income
Operating expense
Bad debt charge
Leverage (x)
Valuation data
Year to
12/2013a
12/2014e
12/2015e
12/2016e
13.9
12.2
1.7
4.7
4.0
12.9
11.2
1.6
5.4
4.3
11.8
9.9
1.5
5.0
4.7
10.4
8.3
1.4
5.6
5.3
PE*
P/NAV
Dividend yield (%)
Issuer information
Share price
(SAR)18.35
Reuters (Equity)
Market cap (USDm)
Free float (%)
Country
Analyst
Target price
1010.SE
14,677
31
Saudi Arabia
Aybek Islamov
Bloomberg (Equity)
Market cap (SARm)
Sector
Contact
2
(%) 4
.
2
(SAR)20.50
RIBL AB
49,500
COMMERCIAL BANKS
+9714 423 6921
21
21
19
19
17
17
15
15
13
13
11
11
9
2012
2013
Riyad Bank
Ratios (%)
Cost/income ratio
Bad debt charge
NPL/loan
NPL/RWA
Net write-off/RWA
Coverage
12/2013a
Price relative

Year to
Year to
36.4
0.5
85.6
0.9
0.6
0.9
0.8
152.8
12.5
36.3
0.5
86.3
1.0
0.7
1.1
0.1
152.1
12.8
34.2
0.6
86.3
1.2
0.8
1.2
0.1
142.1
13.3
31.7
0.8
86.3
1.2
0.9
1.4
0.1
167.5
14.2
1.32
1.32
0.73
10.82
10.82
1.42
1.42
0.78
11.39
11.39
1.56
1.56
0.86
12.01
12.01
1.76
1.76
0.97
12.72
12.72
2014
9
2015
Per share data

DPS
NAV
31
abc
Equities
Saudi Arabia
July 2014

SAMBA AB, Price SAR42.0, OW, TP
SAR55
Company description
Samba was established in 1980 and was branded
the Saudi American bank until 2003. Samba is
primarily a corporate bank. As of March 2014,
Samba had a network of 72 branches. Samba has
10% market share in loans & 11% in assets in
Saudi Arabia as of the end of March 2014.
Samba was established as a joint-stock company
with the takeover of Citibank branches in Jeddah and
Riyadh, under a Saudi programme that forced all
foreign banks to share ownership, with local Saudi
nationals acquiring 60% ownership. In 1999, Samba
merged with United Saudi Bank (USB) through a
share exchange. Citibank sold its 20% ownership
stake in Samba in 2003 to the General Organization
of Social Insurance (GOSI). In 2007 Samba acquired
majority ownership in the then-named Crescent
Commercial Bank, now known as Samba Bank
Limited Pakistan. The subsidiary provides
commercial banking services and turned profitable
in 2011 for the first time. Samba increased its
ownership in the subsidiary in 2010, from 68% to
81% currently.
Investment thesis
Strong capacity to improve asset mix in favour of
loans. Sambas loan to asset ratio improved to 57%
in Q2 14 from a low of 43% in 2010. We see further

scope for improvement, as the bank focuses on loandriven growth. We normalise Sambas loan to asset
ratio at 60%, and see scope for it to rise further. For
comparison, peer banks in Saudi have loan to asset
ratios of 65% on average.
32
Core revenue growth and strong funding

franchise. As a result, we expect core revenue
growth at Samba to recover to 8% in 2014e and

9% in 2015e from -3% in 2013. Sambas
competitive advantage centres on its strong
funding franchise. Demand deposits make up 67%
of total deposits at the bank and the absolute
funding cost was just 68bp in Q1 14. This gives
Samba strong capacity to grow its customer loans
without large upside risk to funding costs.
Sambas loan to deposit ratio remains low at 72%
and we normalise this to 75% going forward.
Generous collective reserve keeps cost of risk
low. While the bank does not fully disclose its
collective provision reserves, the portion of the
collective reserve disclosed in Tier 2 (SAR1,566m),
is equivalent to 1.3% of the loan book. This makes
Samba the bank with highest collective provision
ratio within our Saudi coverage. Although, similar to
Alrajhi bank, Samba appears to have a shortfall in
terms of specific loan loss reserves, Samba can cover
any shortfall by using its collective provisions.
Hence, rich collective provision should prevent
volatility in cost of risk, which is so common to
other Saudi banks.
Financials
We forecast Samba to report earnings of SAR4.8bn
(before zakat) in 2014e, an increase of 7% over
2013, on the back of 7% increases in non-interest
income and net interest income respectively,
generating an ROE of 13.7%. Our earnings estimates
are 2% and 1% above Bloomberg consensus in
2014e and 2015e, respectively.
Aybek Islamov*
Analyst
+ 971 4423 6921
Equities
Saudi Arabia
July 2014
abc
Valuation
Samba is 11.1%. Under our research model, for
which is above the Neutral band of 4%-14% for
stock Overweight. The stock is currently trading
at 1.4x 2014e book value, for an ROE of 13.7%.
returns for the Saudi banks, since we use a residual
Risks
Downside risks to our rating and target price

include stronger aversion to loan risk as a
result of negative pressure on loan pricing, in
particular in the corporate banking segment.
33
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Samba Financial Group

Year to

12/2013a
12/2014e
12/2015e
12/2016e
4,528
1,600
293
579
7,001
-2,137
-353
0
4,510
0
4,510
0
0
4,510
4,510
4,727
1,813
215
730
7,485
-2,221
-451
0
4,812
0
4,812
0
0
4,812
4,812
5,240
2,011
140
659
8,049
-2,346
-507
0
5,197
0
5,197
0
0
5,197
5,197
6,152
2,231
0
639
9,022
-2,541
-703
0
5,778
0
5,778
0
0
5,778
5,778
33,787
33,787
113,455
60,341
158,337
190,929
205,037
36,623
36,623
125,644
57,092
172,587
203,557
221,107
39,686
39,686
140,616
57,328
189,846
221,364
241,429
43,091
43,091
157,897
56,137
212,627
244,111
267,615
P&L summary (SARm)

Net interest income
Trading profits
Other income
Total income
Operating expense
Bad debt charge
Other
HSBC PBT
Exceptionals
PBT
Taxation
Attributable profit
Ordinary equity
Customer loans
Customer deposits
Total assets
Capital (%)
RWA (SARm)
Core tier 1
Total tier 1
Total capital
188,295
18.6
18.6
19.4
197,755
18.6
18.6
19.4
215,777
18.5
18.5
19.2
235,954
18.3
18.3
19.0
12/2013a
12/2014e
12/2015e
12/2016e
Total income
Operating expense
EPS
HSBC EPS
DPS
4.6
3.6
5.0
4.2
4.2
0.3
10.1
6.9
3.9
8.2
6.7
6.7
6.7
8.4
7.5
5.6
8.4
8.0
8.0
8.0
8.4
12.1
8.3
13.6
11.2
11.2
11.2
8.6
30.5
0.3
71.7
1.7
1.1
1.6
0.2
145.5
14.0
29.7
0.4
72.8
1.7
1.1
1.6
0.1
149.1
13.7
29.1
0.4
74.1
1.7
1.1
1.7
0.1
148.3
13.6
28.2
0.5
74.3
1.7
1.2
1.8
0.1
152.5
14.0
3.76
3.76
1.22
28.16
28.16
4.01
4.01
1.31
30.52
30.52
4.33
4.33
1.41
33.07
33.07
4.82
4.82
1.57
35.91
35.91
Per share data

DPS
NAV
34
12/2013a
12/2014e
12/2015e
12/2016e
2.6
0.2
0.3
-1.2
2.7
-0.2
2.5
5.5
12.9
2.4
0.1
0.4
-1.2
2.7
-0.2
2.5
5.5
13.1
2.5
0.1
0.3
-1.1
2.8
-0.2
2.5
5.4
13.1
2.7
0.0
0.3
-1.1
2.9
-0.3
2.6
5.5
13.4
Net interest income

Trading profits
Other income
Operating expense
Bad debt charge
Leverage (x)
Valuation data
Year to
12/2013a
12/2014e
12/2015e
12/2016e
11.2
10.4
1.5
5.9
2.9
10.5
9.6
1.4
8.2
3.1
9.7
8.8
1.3
7.8
3.4
8.7
7.8
1.2
8.7
3.7
PE*
P/NAV
Dividend yield (%)
Issuer information
Share price
(SAR)42.00
Reuters (Equity)
Market cap (USDm)
Free float (%)
Country
Analyst
Target price
1090.SE
13,437
51
Saudi Arabia
Aybek Islamov
Bloomberg (Equity)
Market cap (SARm)
Sector
Contact
2
(%) 7
.
0
(SAR)55.00
SAMBA AB
49,485
COMMERCIAL BANKS
+9714 423 6921
62
62
57
57
52
52
47
47
42
42
37
37
32
32
27
27
22
2012
2013
Ratios (%)
Cost/income ratio
Bad debt charge
NPL/loan
NPL/RWA
Net write-off/RWA
Coverage
Year to
Price relative

Year to
Overweight
2014
22
2015
abc
Equities
Saudi Arabia
July 2014
Alrajhi Banking &

Investment
RJHI AB, Price SAR67.75, Neutral,
TP SAR74
Company description
Al Rajhi was established in 1957 and was
established as a Saudi share holding company
in 1988.
Al Rajhi bank is run by a management
organization that includes the headquarters in
Riyadh and six regional departments. The bank
has the largest network of branches (over 500
branches) in the Kingdom and largest ATM
network. The bank also has a presence in
Malaysia, Kuwait and Jordan.
Investment thesis
Core revenue growth will struggle to improve.
Slowing loan growth and a declining NIM will

constrain core revenue growth at Alrajhi Bank.
We estimate net interest income and fee income
will grow at a 4% CAGR 2013-2015e.
Pressure on operating costs constrains
pre-provision income growth. In addition to slow
core revenue growth, we expect Alrajhi bank to see
upward pressure on operating costs. A relatively
heavy reliance on remittance business where the
bank has to rely on outsourced labour means
upside risk to operating costs in light of the recent
labour crackdown in Saudi Arabia. We believe that
outsourced labour costs could more than double as
the supplying companies either have to employ
more Saudis or pay up for work permits for expat
employees. Growth in operating costs already

accelerated to 12% yoy in Q1 14, from 7% in 2013.
We therefore expect pre-provision income in 2014e
to remain flat on last year.
Specific provisions may need to rise further.
The low 2.3% collateral to loan ratio means the

specific provisions may continue to surprise
negatively as and when impairments occur at
Alrajhi. We note that the sum of disclosed
collateral against individually impaired loans of
SAR971m and specific loan loss reserves of
SAR1,789m fell short of NPLs of SAR3,008m by
SAR248m as at Q4 13. This shortfall is equivalent
to 2% of 2013 pre-provision income. We factor in
a cost of risk of 110bp and 93bp in 2014e and
2015e, respectively.
Aybek Islamov*
Analyst
+ 971 4423 6921
Financials
We forecast Al Rajhi to report earnings of
SAR7.75bn (before zakat) in 2014e, an increase
of 4% over 2013, on the back of 5% increase in
net interest income, generating an ROE of 20.6%.
Our earnings estimates are 1% and 6% below
Bloomberg consensus in 2014e and 2015e,
respectively.
Valuation
35
Equities
Saudi Arabia
July 2014

Al Rajhi is 11.1%. Under our research model, for
stock Neutral. The stock is currently trading at
returns for the Saudi banks, since we use residual
Risks
Downside risk includes further cuts in the

dividend pay-out ratio. Note that Alrajhi Bank
reduced its pay-out ratio to 50% based on
2013 profit from 62% a year ago.
Upside risks centre on stronger lending

volumes, in particular in the corporate
segment. Also, a stronger-than-expected
decline in bad asset charges may lead to
stronger EPS growth than we forecast.
36
abc
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Alrajhi Banking & Investm

Year to

12/2013a
12/2014e
12/2015e
12/2016e
9,606
2,846
0
1,663
14,115
-4,057
-2,619
0
7,438
0
7,438
0
0
7,438
7,438
10,056
2,916
0
1,507
14,480
-4,474
-2,253
0
7,752
0
7,752
0
0
7,752
7,752
10,474
3,095
0
1,553
15,122
-4,804
-2,109
0
8,209
0
8,209
0
0
8,209
8,209
11,341
3,302
0
1,622
16,265
-5,152
-2,051
0
9,062
0
9,062
0
0
9,062
9,062
36,155
36,155
186,813
16,117
231,589
264,634
279,871
39,274
39,274
208,452
16,843
257,064
281,249
306,430
42,586
42,586
228,708
17,618
287,912
308,377
340,801
45,942
45,942
250,527
18,445
322,461
343,460
379,199
P&L summary (SARm)

Net interest income
Trading profits
Other income
Total income
Operating expense
Bad debt charge
Other
HSBC PBT
Exceptionals
PBT
Taxation
Attributable profit
Ordinary equity
Customer loans
Customer deposits
Total assets
Capital (%)
RWA (SARm)
Core tier 1
Total tier 1
Total capital
207,670
18.5
18.5
19.6
220,577
18.8
18.8
19.8
244,510
18.3
18.3
19.2
282,752
17.0
17.0
17.9
12/2013a
12/2014e
12/2015e
12/2016e
Total income
Operating expense
EPS
HSBC EPS
DPS
0.9
7.4
-1.4
-5.7
-5.7
-23.1
10.8
2.6
10.3
-0.5
4.2
4.2
3.4
8.6
4.4
7.4
3.1
5.9
5.9
5.9
8.4
7.6
7.2
7.7
10.4
10.4
10.4
7.9
12/2013a
12/2014e
12/2015e
12/2016e
4.8
0.0
0.8
-2.0
5.0
-1.3
3.7
5.9
19.4
4.7
0.0
0.7
-2.1
4.7
-1.1
3.6
5.7
18.7
4.5
0.0
0.7
-2.1
4.4
-0.9
3.5
5.7
18.4
4.3
0.0
0.6
-2.0
4.2
-0.8
3.4
6.0
18.8
Net interest income

Trading profits
Other income
Operating expense
Bad debt charge
Leverage (x)
Valuation data
Year to
12/2013a
12/2014e
12/2015e
12/2016e
14.8
10.9
3.0
5.9
3.4
14.2
11.0
2.8
6.2
3.5
13.4
10.7
2.6
5.9
3.7
12.1
9.9
2.4
5.8
4.1
PE*
P/NAV
Dividend yield (%)
Issuer information
Share price
(SAR)67.75
Reuters (Equity)
Market cap (USDm)
Free float (%)
Country
Analyst
Target price
1120.SE
29,354
45
Saudi Arabia
Aybek Islamov
Bloomberg (Equity)
Market cap (SARm)
Sector
Contact
2
(%) 7
.
0
(SAR)74.00
RJHI AB
110,094
COMMERCIAL BANKS
+9714 423 6921
78
78
73
73
68
68
63
63
58
58
53
53
48
48
43
43
38
2012
2013
Alrajhi Banking & Investm
Ratios (%)
Cost/income ratio
Bad debt charge
NPL/loan
NPL/RWA
Net write-off/RWA
Coverage
Year to
Price relative

Year to
Neutral
28.7
1.5
80.7
0.0
1.4
2.1
1.3
0.0
21.6
30.9
1.1
81.1
0.0
1.4
2.1
0.9
0.0
20.6
31.8
1.0
79.4
0.0
1.4
2.2
0.6
0.0
20.1
31.7
0.9
77.7
0.0
1.2
2.0
0.6
0.0
20.5
4.58
4.58
2.31
22.25
22.25
4.77
4.77
2.39
24.17
24.17
5.05
5.05
2.53
26.21
26.21
5.58
5.58
2.79
28.27
28.27
2014
38
2015
Per share data

DPS
NAV
37
abc
Equities
Saudi Arabia
July 2014
Alinma
ALINMA AB, Price SAR19.85,
Neutral, TP SAR21.30
Company description
Alinma Bank was founded in 2006 and is
headquartered in Riyadh. As of January 2014, the
banks had a network of 96 branches and 830 ATMs.
As of March 2014 the bank had 4% market share
in loans & 3% in assets in Saudi Arabia.
Investment thesis
Good collateral coverage of loan book. Alinma
has the highest collateral to loan ratio (at 86%)

among the banks in our coverage which disclose
collateral. The higher collateral level at Alinma
(which improved from 41% in 2010) should result
in less upward pressure on cost of risk as and
when impairments start to rise.
We factor in cost of risk of 61bp and 67bp in 2014e
and 2015e, respectively, and expect the bulk of
provision expenses to be directed into the collective
provision reserve. The collective loan loss reserve
to loans ratio reached 0.7% in Q4 13, up from 0.5%
in 2012.
Surplus capital provides room for a dividend
payment. Alinma remains extremely well
capitalised, with a Tier 1 ratio of 27.8% as at Q1 14,

despite loan book tripling in size since 2010. We see
scope for a dividend payment, although we view this
as a potential positive surprise which we do not
factor into our explicit 2014e-2018e forecast period.
Assuming a 16% CAGR 13-18e in customer loans,
we calculate that Alinma could pay SAR3bn to
SAR3.5bn in dividends. This represents 10-12% of
38
the banks current market cap. The payment of a

deferred tax liability in Q4 13, of SAR894.4m
points to a potential preparation by the company for
a dividend payment, in our view.
Financials
We forecast Alinma to report earnings of
SAR1.2bn (before zakat) in 2014e, an increase of
20% over 2013, on the back of 16% and 7%
increases in net-interest income and net interest
income respectively, generating an ROE of 6.9%.
Our earnings estimates are 4% and 12% above
Bloomberg consensus in 2014e and 2015e,
respectively.
Valuation
Alinma is 11.1%. Under our research model, for
Aybek Islamov*
Analyst
+ 971 4423 6921
Equities
Saudi Arabia
July 2014
abc
price of SAR21.30 implies a potential return of

7%, which is within the Neutral band of 4%-14%
for non-volatile Saudi stocks; therefore, we rate
the stock Neutral. The stock is currently trading at
potential returns for the Saudi banks, since we use a
Risks
Downside risks centre on negative surprises

in asset quality and a stronger deceleration in
loan growth than we forecast.
Upside risks centre on a stronger-thanexpected increase in interest rates, either long

term or short term, as well as better asset
quality than we forecast.
39
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Alinma
Neutral
Year to

12/2013a
12/2014e
12/2015e
12/2016e
1,835
273
31
141
2,279
-990
-274
-10
1,005
0
1,005
0
0
1,005
1,005
2,132
316
39
120
2,606
-1,098
-303
0
1,205
0
1,205
0
0
1,205
1,205
2,421
371
44
138
2,974
-1,208
-393
0
1,372
0
1,372
0
0
1,372
1,372
2,755
435
49
152
3,390
-1,317
-490
0
1,584
0
1,584
0
0
1,584
1,584
16,832
16,832
44,924
5,399
42,763
55,594
63,001
18,037
18,037
53,734
5,939
53,453
66,134
75,077
19,409
19,409
62,123
6,533
69,489
76,071
92,676
20,993
20,993
71,193
7,187
83,387
87,467
108,358
P&L summary (SARm)

Net interest income
Trading profits
Other income
Total income
Operating expense
Bad debt charge
Other
HSBC PBT
Exceptionals
PBT
Taxation
Attributable profit
Ordinary equity
Customer loans
Customer deposits
Total assets
Capital (%)
RWA (SARm)
Core tier 1
Total tier 1
Total capital
60,495
0.0
27.8
28.4
75,621
0.0
23.9
24.3
96,785
0.0
20.1
20.4
110,521
0.0
19.0
19.3
12/2013a
12/2014e
12/2015e
12/2016e
Total income
Operating expense
EPS
HSBC EPS
DPS
24.8
7.0
43.1
37.0
37.0
14.4
11.0
16.9
19.9
19.9
14.1
10.0
17.1
13.9
13.9
14.0
9.0
17.4
15.4
15.4
1.0
7.2
7.6
8.2
43.4
0.7
105.1
0.7
0.5
0.9
0.0
170.0
6.0
42.1
0.6
100.5
1.1
0.8
1.0
0.0
131.3
6.9
40.6
0.7
89.4
1.4
0.9
1.2
0.0
128.7
7.3
38.8
0.7
85.4
1.7
1.1
1.4
0.0
131.1
7.8
0.68
0.68
0.00
11.33
11.33
0.81
0.81
0.00
12.15
12.15
0.92
0.92
0.00
13.07
13.07
1.07
1.07
0.00
14.14
14.14
Per share data

DPS
NAV
40
12/2014e
12/2015e
12/2016e
3.3
0.1
0.3
-1.8
2.3
-0.5
1.8
3.3
6.0
3.1
0.1
0.2
-1.6
2.2
-0.4
1.8
3.9
6.7
2.8
0.1
0.2
-1.4
2.0
-0.5
1.6
4.6
7.1
2.7
0.0
0.1
-1.3
2.0
-0.5
1.5
5.1
7.5
Net interest income

Trading profits
Other income
Operating expense
Bad debt charge
Leverage (x)
Valuation data
Year to
12/2013a
12/2014e
12/2015e
12/2016e
29.3
22.9
1.8
1.2
0.0
24.5
19.6
1.6
0.5
0.0
21.5
16.7
1.5
-0.4
0.0
18.6
14.2
1.4
2.1
0.0
PE*
P/NAV
Dividend yield (%)
Issuer information
Share price
(SAR)19.85
Reuters (Equity)
Market cap (USDm)
Free float (%)
Country
Analyst
Target price
1150.SE
7,939
70
Saudi Arabia
Aybek Islamov
Bloomberg (Equity)
Market cap (SARm)
Sector
Contact
2
(%) 7
.
0
(SAR)21.30
ALINMA AB
29,775
COMMERCIAL BANKS
+9714 423 6921
22
22
20
20
18
18
16
16
14
14
12
12
10
10
8
2012
2013
Alinma Bank
Ratios (%)
Cost/income ratio
Bad debt charge
NPL/loan
NPL/RWA
Net write-off/RWA
Coverage
12/2013a
Price relative

Year to
Year to
2014
8
2015
abc
Equities
Saudi Arabia
July 2014
Bank AlBilad
ALBI AB, Not Rated
Company description
2011 to 2% now. Also, coverage ratio has

increased to 194% from c130% levels in 2011.
Bank Albilad is a Saudi Joint Stock Company

incorporated in 2004; commencing its operations in
2005. The bank is engaged in providing full range
of banking services, financing and investing
activities through various Islamic instruments. The
activities of the Bank are conducted in accordance
with Islamic Shariah and within the provisions of
the Articles and Memorandum of Association, bylaws and the Banking Control Law.
The bank largely funds itself through customer

deposits and equity, which make up 80% and 14%
of total capital, respectively. As at 1Q14, 92% of
customer deposits were low-cost current
account deposits.
The bank has 2 fully owned subsidiaries, 1)

AlBilad Investment Company- it is involved in
dealing, managing, arranging, advising and
custody of securities. 2) AlBilad Real Estate
Company the subsidiary is involved in
registering the real estate collateral that the bank
obtains from its customers.
As at the end of March 2014, the bank had a
network of 102 branches and 151 exchange and
remittance centers.
Financials
Recent news
The bank reported net income of SAR204mn
for the first quarter of 2014, which is an
increase of 18% q-o-q and 16% y-o-y. The
net interest income increased by 14% q-o-q
and y-o-y. The sequential increase in NII was
driven by both increase in net interest margins
and loan growth. The NII/avg assets increased
by 8 bps q-o-q to 2.59% in Q2'14. The noninterest income was up 10% q-o-q and 8% yo-y. The loan book grew sharply, up 10% qo-q and 32% y-o-y. Whereas, the deposits
increased by 5% q-o-q and 24% y-o-y which
resulted in LDR moving to 80% in Q2'14
compared to 77% in Q1'14 and 76% in Q2'13.
Bank Albilad had a 2% market share in total loans

& assets in Saudi Arabia as at March 2014. The
bank had an above industry average capital
adequacy ratio of 19% as at Q1 2014. The tier1
capital ratio is at 14% at the end of Q1 2014.
As at 30 June 2014, total assets stood at
SAR41bn, customer deposits at SAR33bn, and
loans and advances at SAR26.8bn. NPL ratio at
the end of Q1 2014 was 2%; the bank has
managed to bring down NPL ratio from c5% in
41
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Bank Al-Bilad
Not Rated
Year to

12/2010a
12/2011a
12/2012a
12/2013a
P&L summary (SARm)

Net interest income
Trading profits
Other income
Total income
Operating expense
Bad debt charge
Other
PBT
Taxation
Attributable profit
625
342
0
133
1,099
-717
-290
0
92
0
0
92
703
458
0
212
1,374
-792
-252
0
330
0
0
330
840
645
0
253
1,737
-894
-275
373
942
0
0
942
947
666
0
305
1,917
-1,018
-170
0
729
0
0
729
3,103
12,290
382
16,932
20,430
21,117
3,416
13,780
422
23,038
27,020
27,727
4,371
18,256
571
23,742
29,301
29,778
5,101
23,415
976
29,108
35,425
36,323
18,160
16.6
17.4
19,982
15.4
18.3
25,086
13.7
18.5
25,086
13.7
18.5
Year to
12/2010a
12/2011a
12/2012a
12/2013a
3.4
0.0
0.7
3.9
6.8
0.5
3.5
0.0
1.1
4.0
7.9
1.6
3.3
0.0
1.0
3.6
7.9
3.8
3.8
0.0
1.2
4.1
8.9
2.9
Net interest income

Trading profits
Other income
Operating expense
Attributable profit
Valuation data
Year to
12/2010a
12/2011a
12/2012a
12/2013a
156.9
4.7
43.9
4.2
15.4
3.3
19.9
2.8
PE
P/NAV

Ordinary equity
Customer loans
Customer deposits
Total assets
Capital (%)
RWA (SARm)
Total tier 1
Total capital

Year to
12/2010a
12/2011a
12/2012a
12/2013a
Total income
Operating expense
EPS
DPS
NAV
20.9
-9.7
232.5
-137.2
0.0
3.4
25.0
10.4
52.4
257.0
0.0
10.1
26.5
12.9
45.0
185.7
0.0
27.9
10.4
13.9
6.5
-22.6
0.0
16.7
65.3
2.0
76.3
5.5
-3.9
89.4
3.0
57.6
1.8
63.7
4.7
-3.4
129.0
10.1
51.4
1.6
81.5
3.9
-3.0
145.4
24.2
53.1
0.8
83.5
1.9
-1.8
194.3
15.4
0.31
0.00
10.34
1.10
0.00
11.39
3.14
0.00
14.57
2.43
0.00
17.00
Per share data

DPS
42
Share price
(SAR)
Reuters (Equity)
Market cap (USDm)
Free float (%)
Country
4
(%) .
8
48.30
1140.SE
4,712
51
Saudi Arabia
Bloomberg (Equity)
Market cap (SARm)
Sector
ALBI AB
19,322
Commercial Banks
Price relative
40
40
35
35
30
30
25
25
20
20
15
15
10
2012
10
2013
Bank Albilad
Ratios (%)
Cost/income ratio
Bad debt charge
NPL/loan
NPL/RWA
Coverage
Issuer information
2014
Relative to Tadawul
abc
Equities
Saudi Arabia
July 2014
Bank AlJazira
BJAZ AB, Not Rated
Company description
Bank Al-Jazira (BAJ) is a Joint Stock Company
incorporated in 1976 with the takeover of The
National Bank of Pakistan's (NBP) branches in the
Kingdom of Saudi Arabia.
BAJ is one of the leading Shari'ah- compliant,
client-driven, service-oriented and fast-growing
financial institutions in Saudi Arabia, providing
individuals, businesses and institutions with
innovative Shari'ah-compliant financial services.
BAJ was the first banking institution in Saudi
Arabia to introduce Takaful Ta'awuni (TT) in 2002
as a full-fledged Shari'ah-compliant alternative
solution for traditional life insurance. Since then, TT
has proved itself as a market leader.
The bank has 2 subsidiaries: 1)AlJazira Capital
Company and 2) Aman Development and Real
Estate Investment Company; these are engaged in
brokerage, asset management, holding &
managing collateral on behalf of the Bank. The
bank also has 35% stake in AlJazira Takaful
Taawuni Company which provides insurance
activities in the sector of protection and saving.
As per latest available data, BAJ had a relatively
small branch network of 62 branches.
Financials
Bank Al-Jazira had 3% market share in total loans
& assets in Saudi Arabia as at March 2014. The
bank is slowly increasing market share in loans &
assets since last few years (market share was 2%
in total loans & assets 2 years back).
The banks capital adequacy ratio was 14.1% at
end of Q1 2014 with a Tier 1 ratio of 11.5%. The
NPL ratio at the end of Q1 2014 was 1.2% down
from 3.3% in Q4 2012. The bank has improved its
coverage ratio to 158% from 134% in last 1 year.
SAR60.6bn, customer deposits at SAR48.5bn, and
loans and advances at SAR36.7bn.
Recent news
Bank Al Jazira reported net profit came in at
SAR 167m for Q214 which is up 5% qoq but
flat y-o-y. The net interest income increased
by 11% q-o-q and 18% y-o-y. The sequential
increase in NII was driven by loan growth and
increase in net interest margins. The loan
growth was 6% q-o-q and 17% y-o-y (above
sector average). The non-interest income was
also up at 9% q-o-q and 45% y-o-y. The
deposits increased by 7% q-o-q and 15% y-oy which resulted in LDR going down to 75%
in Q2'14 compared to 76% in Q1'14.
43
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Bank AlJazira
Not Rated
Year to
12/2010a
12/2011a
12/2012a
12/2013a
P&L summary (SARm)

Net interest income
Trading profits
Other income
Total income
Operating expense
Bad debt charge
Other
PBT
Taxation
Attributable profit
717
265
28
145
1,155
-764
-362
0
29
0
0
29
781
356
11
59
1,208
-835
-70
0
303
0
0
303
951
564
36
50
1,601
-928
-172
0
501
0
0
500
1,223
468
38
148
1,839
-1,051
-136
0
651
0
0
651
4,806
18,704
27,345
31,438
33,018
4,937
23,307
1,000
31,159
37,414
38,898
5,186
29,897
1,000
40,675
49,243
50,957
5,729
34,995
1,000
48,083
53,542
59,976
29,894
15.1
15.7
34,708
13.6
17.4
41,349
12.1
15.7
46,863
12.2
15.0
Year to
12/2010a
12/2011a
12/2012a
12/2013a
2.4
0.1
0.5
-2.6
1.3
0.1
2.3
0.0
0.2
-2.4
1.1
0.9
2.3
0.1
0.1
-2.2
1.6
1.2
2.2
0.1
0.1
-2.0
1.6
1.3
Net interest income

Trading profits
Other income
Operating expense
Attributable profit
Valuation data
Year to
12/2010a
12/2011a
12/2012a
12/2013a
342.4
2.1
32.7
2.0
19.8
2.0
15.2
1.7
PE
P/NAV

Ordinary equity
Customer loans
Customer deposits
Total assets
Capital (%)
RWA (SARm)
Total tier 1
Total capital

Year to
12/2010a
12/2011a
12/2012a
12/2013a
Total income
Operating expense
EPS
DPS
NAV
-1.4
5.3
-12.2
5.0
2.4
4.6
9.2
-4.5
947.5
2.7
32.5
11.1
80.3
65.3
5.0
15.1
13.7
17.1
30.0
14.3
Ratios (%)
Cost/income ratio
Bad debt charge
NPL/loan
NPL/RWA
Coverage
44
Share price
(SAR)
Reuters (Equity)
Market cap (USDm)
Free float (%)
Country
66.2
2.1
68.4
6.7
4.5
84.5
0.6
69.1
0.3
74.8
4.2
3.0
117.4
6.2
58.0
0.6
73.5
3.3
2.5
132.4
9.9
57.1
0.4
72.8
1.2
1.8
154.0
12.1
0.10
16.02
1.01
0.53
16.46
1.67
17.29
2.17
19.1
4
(%) .
8
33.00
1020.SE
3,437
74
Saudi Arabia
Bloomberg (Equity)
Market cap (SARm)
Sector
BJAZ AB
13,200
Commercial Banks
Price relative
45
45
40
40
35
35
30
30
25
25
20
20
15
15
10
2012
10
2013
Bank Aljazira
Per share data (SAR)

DPS
Issuer information
2014
Relative to Tadawul
abc
Equities
Saudi Arabia
July 2014
Saudi Hollandi Bank

AAAL AB, Not Rated
Company description
Originally known as The Netherlands Trading
Society, Saudi Hollandi Bank (SHB) was the
first operating bank in Saudi Arabia. The bank
was established in 1977 as a Joint Venture
Company. ABN AMRO Bank N. V. is the largest
stakeholder in the bank with a 40% stake.
Saudi Hollandi Bank is engaged in conventional
as well as Islamic banking solutions. The bank is
primarily a corporate bank with corporate loans
representing c85% of total loans at end of Q1
2014. The bank has 3 subsidiaries, 1) Saudi
Hollandi Capital (SHC) it engages as principle
and agent in retail equity brokerage, asset
management, corporate finance and investment
advisory activity, debt arrangement and securities
custody services. 2) Saudi Hollandi Real Estate
Company (SHREC) involved in the registration
of real estate title deeds in support of the Banks
Home Financing products. 3) Saudi Hollandi
Insurance Agency Company (SHIAC), a wholly
owned subsidiary of SHB, the subsidiary
commenced its operations in 2012 and is licensed
in insurance activities. The bank acquired a 20%
stake in in Wataniya Insurance Company in 2008;
this acquisition enables the Bank to have an
insurance capability to complement the existing
retail banking offering.
Financials
Saudi Hollandi Bank had a 5% market share in
total loans & 4% in total assets in Saudi Arabia as
at March 2014. The bank had a above industry
capital adequacy ratio of 18% as at Q1 2014 (up
from 16% in Q3 2012).
SAR89.5bn, customer deposits at SAR71bn and
loans and advances at SAR60bn. NPL ratio at the
end of Q1 2014 was 1.3%, with a provision
coverage of 160%. The bank has maintained
stable NPL ratio of 1.4% since start of the year
with a coverage ratio of c160%.
Recent news
In December 2013, the bank privately placed
SAR2.5bn ($667mn) tier 2 sukuk. The sukuk
has a tenor of 10 years carries a half yearly
profit of 6 months SIBOR + 1.55%.
SHB reported net income of SAR 480mn for
the second quarter 2014, increasing 28% yoy
and 15% on a sequential basis. Customer
loans and deposits increased by 18% and
16%, respectively, to reach SAR60.4bn and
SAR71bn.
As per latest available data, the bank had a

network of 48 branches (December 2013).
45
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Saudi Hollandi Bank

Year to
Not Rated
12/2010a
12/2011a
12/2012a
12/2013a
P&L summary (SARm)

Net interest income
Trading profits
Other income
Total income
Operating expense
Bad debt charge
Other
PBT
Taxation
Attributable profit
1,287
455
31
181
1,954
-772
-389
-3
790
0
0
790
1,290
519
6
191
2,005
-802
-161
-8
1,034
0
-2
1,032
1,372
628
5
215
2,219
-845
-140
19
1,253
0
0
1,253
1,624
732
-1
261
2,616
-895
-218
0
1,502
0
-1
1,502
6,387
35,039
1,500
41,604
50,643
52,864
7,408
37,745
1,500
45,024
54,551
56,940
8,306
45,276
2,900
53,914
59,490
68,506
9,401
53,652
4,625
61,875
74,360
80,468
50,176
12.7
16.3
53,073
13.2
16.6
63,196
12.4
17.6
75,790
11.8
18.3
Year to
12/2010a
12/2011a
12/2012a
12/2013a
3.1
0.0
0.4
1.6
4.7
0.2
2.6
0.1
0.4
1.5
4.3
1.6
2.4
0.0
0.4
1.5
4.1
1.9
2.2
0.0
0.3
1.3
3.9
2.0
Net interest income

Trading profits
Other income
Operating expense
Attributable profit
Valuation data
Year to
12/2010a
12/2011a
12/2012a
12/2013a
20.5
2.5
15.7
2.2
15.5
2.3
12.9
2.1
PE
P/NAV

Ordinary equity
Customer loans
Customer deposits
Total assets
Capital (%)
RWA (SARm)
Total tier 1
Total capital

Year to
12/2010a
12/2011a
12/2012a
12/2013a
-9.0
-4.9
-11.4
819.8
13.4
2.6
3.9
1.8
30.6
16.0
10.7
5.4
14.2
1.2
-1.8
-6.6
17.9
5.9
25.3
19.8
0.0
13.2
Total income
Operating expense
EPS
DPS
NAV
39.5
1.0
84.2
2.6
1.9
124.4
13.2
40.0
0.4
83.8
1.9
1.4
145.4
15.0
38.1
0.3
84.0
1.6
1.1
152.8
15.9
34.2
0.4
86.7
1.3
1.0
161.5
17.0
2.39
0.00
19.31
3.12
1.14
22.40
3.16
1.12
20.93
3.78
1.12
23.69

DPS
46
Share price
(SAR)
Reuters (Equity)
Market cap (USDm)
Free float (%)
Country
4
(%) .
8
48.90
1040.SE
4,530
50
Saudi Arabia
Bloomberg (Equity)
Market cap (SARm)
Sector
AAAL AB
23,290
Commercial Banks
Price relative
45
45
40
40
35
35
30
30
25
25
20
2012
20
2013
2014
SHB
Ratios (%)
Cost/income ratio
Bad debt charge
NPL/loan
NPL/RWA
Coverage
Issuer information
Relative to Tadawul
abc
Equities
Saudi Arabia
July 2014
Saudi Investment Bank

SIBC AB, Not rated
Company description
The Saudi Investment Bank was established in
1976. The bank provides traditional wholesale,
retail and commercial banking products. On the
retail side they offer Shari-ah compliant products
and services including accounts, murabaha
investments and personal finance solutions. The
bank has established joint-ventures and
subsidiaries to cater to investment banking and
share trading, asset management, leasing,
mortgages, insurance and credit cards.
The banks subsidiaries and associates include
Alistithmar Capital (100%), SAIB BNP Paribas
Asset Management Company Limited (55%),
Saudi Investment Real Estate Company (100%),
Amex Saudi Arabia Limited (50%), Saudi Orix
Leasing Company (38%), Mediterranean Gulf
Insurance and Reinsurance Co. KSA (19%), and
Amlak International for Finance and Real Estate
Development Co. (32%).
As at end of December 2013, SIB had a relatively
small network of 48 branches.
Financials
Saudi Investment Bank has 4.5% market share in
loans and assets in Saudi Arabia as at March
2014. The bank has an above industry average
capital adequacy ratio 15.6% as at Q1 2014
(although this is down from 18% in Q3 2012).
The tier1 capital ratio is above average at 14.8%
in Q1 2014.

SAR88bn, customer deposits at SAR67.7bn, and
loans and advances at SAR54.8bn. NPL ratio at
the end of Q1 2014 was 0.76%, with provision
coverage of 205%. Since the start of 2012, SIB
has brought its NPL ratio from 6% to less than 1
% and has increased provision coverage from
c130% to above 200% currently.
The bank largely funds itself through customer
deposits and equity, which make up 75% and 13%
of total capital, respectively. As at 31 March
2014, 23% of customer deposits were low-cost
demand deposits.
Recent news
Saudi Investment Bank reported net profit
came in at SAR 353m which is up 5% qoq and
10% y-o-y. The net interest income increased
by 5% q-o-q and 8% y-o-y. The sequential
increase in NII was primarily driven by growth
in loan book which was up 5% q-o-q and 36%
y-o-y. However, the pressure on NIM
continued and we estimate NIM to have
declined by 5 bps q-o-q and 45 bps y-o-y to
1.92% in Q2'14. The deposits also grew by 9%
q-o-q and 39% y-o-y which resulted in LDR
moving down to 81% in Q2'14 compared to
84% in Q1'14 and 83% in Q2'13.
In December 2013, Saudi Investment Banks
board of directors recommended to increase
the Bank capital by 9.1% from SAR5.5bn to
SAR6bn by distributing 1 bonus share for
every 11 shares held.
47
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Saudi Investment Bank

Year to
Not Rated

12/2010a
12/2011a
12/2012a
12/2013a
P&L summary (SARm)

Net interest income
Trading profits
Other income
Total income
Operating expense
Bad debt charge
Other
PBT
Taxation
Attributable profit
1,315
242
123
69
1,749
-559
-738
-12
440
0
-11
429
1,226
311
12
66
1,616
-624
-288
8
712
0
-4
708
1,242
315
21
144
1,722
-632
-255
78
912
0
0
912
1,365
394
158
99
2,017
-762
-105
137
1,287
0
0
1,287
8,103
31,002
500
37,215
48,547
51,491
8,557
27,114
1,500
36,770
48,897
51,946
9,379
34,051
2,000
40,414
56,130
59,067
10,253
47,567
2,000
57,044
77,144
80,495
44,888
17.2
17.3
42,506
19.0
19.1
51,027
17.4
17.6
70,716
14.5
15.1
Year to
12/2010a
12/2011a
12/2012a
12/2013a
2.9
0.3
0.2
1.2
4.1
1.0
2.9
0.0
0.2
1.5
4.0
1.7
2.4
0.0
0.3
1.2
3.7
1.8
1.9
0.2
0.1
1.1
3.0
1.8
12/2010a
12/2011a
12/2012a
12/2013a
34.3
1.9
21.2
1.8
16.5
1.6
11.7
1.5
Net interest income

Trading profits
Other income
Operating expense
Attributable profit
Valuation data
Year to
PE
P/NAV

Ordinary equity
Customer loans
Customer deposits
Total assets
Capital (%)
RWA (SARm)
Total tier 1
Total capital

Year to
12/2010a
12/2011a
12/2012a
12/2013a
15.3
3.7
21.7
-33.2
0.0
-10.3
-7.6
11.6
-16.7
61.8
0.0
5.6
6.5
1.3
9.9
28.1
40.0
9.6
17.1
20.5
15.2
41.1
0.0
9.3
Total income
Operating expense
EPS
DPS
NAV
32.0
2.3
83.3
5.4
4.0
110.4
5.5
38.6
0.9
73.7
6.1
4.2
124.6
8.5
36.7
0.8
84.3
1.3
0.9
181.3
10.2
37.8
0.3
83.4
0.8
0.6
178.2
13.1
0.80
0.00
14.73
1.29
0.50
15.56
1.66
0.70
17.05
2.34
0.70
18.64

DPS
48
Share price
(SAR)
Reuters (Equity)
Market cap (USDm)
Free float (%)
Country
4
(%) .
8
27.40
1030.SE
4,268
37
Saudi Arabia
Bloomberg (Equity)
Market cap (SARm)
Sector
SIBC AB
16,440
Commercial Banks
Price relative
35
35
30
30
25
25
20
20
15
15
10
2012
10
2013
2014
SIB
Ratios (%)
Cost/income ratio
Bad debt charge
NPL/loan
NPL/RWA
Coverage
Issuer information
Relative to Tadawul
Equities
Saudi Arabia
July 2014
abc
49
abc
Equities
Saudi Arabia
July 2014

Saudi Arabia is now a major player in the world of basic chemicals
Efforts to add value to hydrocarbon resources and create jobs will
fuel growth
Future growth is towards downstream chemicals, integrated
projects, M&A and a drive towards overseas growth
Evolution of the Middle East

chemical industry
Early days
Petrochemicals production in the Middle East is a
relatively recent phenomenon, dating back a
couple of decades. Apart from some small
capacity in Iran, the development of significant
integrated ethylene and derivatives production
began with the commissioning of SABICs
capacities at Yanbu and Al Jubail in Saudi Arabia
in 1985, which were 50/50 joint ventures that with
Exxon and Shell, respectively.
Middle East ethylene capacity as % of world capacity

20%
18%
16%
14%
12%
10%
8%
6%
Middle East ethylene production by country (2013)
Others
1%
UAE
8%
Kuw ait
6%
Qatar
10%
Iran
16%
4%
2%
0%
1990
1995
Source: IHS Chemical, HSBC
50
From inception, the Saudi petrochemicals industry

was developed specifically to add value to cheap
associated gas created by the nations upstream oil
production, which was initially priced to
petrochemical companies at 50 cents per mmbtu.
Although this was cheaper than commercial gas
prices elsewhere in the world, it was not
subsidised. Since the alternative use for this
associated gas was flaring, the delivery to the
petrochemicals industry generated revenues that
would otherwise have been absent. Other
countries, notably Iran, Qatar, Kuwait and the
UAE, also brought on-stream their first ethylene
crackers in the mid-1990s driven by the urge to
diversify away from petrochemical exports.
2000
2005
2010
Saudi
Arabia
59%
Sriharsha Pappu*, CFA

Analyst
+ 971 4 4236924
abc
Equities
Saudi Arabia
July 2014
However, this scenario changed once US natural

gas prices rose in 2000 as a wave of gas-based
power plants came on-stream, providing an
alternate use for the gas and pushing up prices
from their historical levels of USD1 to 2 per
mmbtu to over USD6 per mmbtu. As the US
chemical industry struggled with rising underlying
prices, the Middle Eastern chemical industry was
able to develop given its cost advantage.
However, the capacity expansion boom as witnessed

over the last decade was absent, and Middle East
chemical capacity remained at a fairly low level of
3-4m tonnes through most of the 1990s.
Saudi Arabia has the largest petrochemical
capacity in the region, accounting for c59% of
Ethylene production in Middle East in 2013.
A rise in US gas prices

The influence that the Middle East has come to
have on the global commodity chemical industry
would not have been the same without the
dramatic change in the energy price environment
that began with the rise in US natural gas prices in
2000 (see chart at the bottom of the page).
Although the Middle East states had access to
cheap stranded gas reserves in the 1990s (as they
took their first steps in developing their chemical
industry), rapid industry growth had been
constrained by the fact that until 2000 the US also
had cheap gas reserves. The pre-2000 cheap US
gas, coupled with access to scale economies,
technology, and proximity to the largest chemical
demand centre in the world, made the US Gulf
Coast one of the most competitive chemical
manufacturing locations in the world and led to
limited capacity growth in the Middle East.
This is shown in the chart below depicting both

crude and natural gas prices from the early
1990s. The bold blue line represents average
prices through the 1990s. It is clear that there
was a secular change in the energy price
environment post 2000.
Shutdowns and a pledge to never

build again
Following the rise in gas prices in the US, several
chemical industries that were large consumers of
natural gas namely, the ammonia and methanol
producers became uncompetitive and shut down
their US operations, leading to a wide-scale shift
in production capacity to regions with more
competitive natural gas prices.
Change in feedstock pricing regime

160
16
140
14
120
12
100
10
80
60
40
20
0
Jan-90
0
Jan-92
Jan-94
Jan-96
Brent ($/bbl)
Jan-98
Jan-00
Jan-02
Natural gas ($/mmbtu), RHS
Jan-04
Jan-06
Jan-08
Jan-10
Jan-12
Jan-14
Natural gas (Avergae in 1990's ), RHS
51
abc
Equities
Saudi Arabia
July 2014
Growth of Middle East basic chemical capacity

_____________ Middle East share of capacity_______________
2000e
2011e
Ethylene
LLDPE
LDPE
HDPE
Propylene
Polypropylene
Ammonia
Urea
Methanol
7%
10%
6%
7%
2%
3%
5%
8%
16%
Share of capacity growth (2000-11e)
18%
19%
12%
19%
7%
12%
9%
11%
20%
41%
29%
45%
42%
16%
24%
23%
23%
20%
Source: CMAI, HSBC
This in turn led to a wave of capacity expansion

for these products in the Middle East. The
petrochemical industry in the US did not
experience the same level of shutdowns, as
increasing demand from emerging economies and
elevated crude oil prices allowed for higher costs
to be passed onto consumers. However, while
large-scale petrochemical capacity shutdowns in
the US were averted, it became apparent that the
region did not have a feedstock position that
allowed for new capacity to be built.
A similar pattern was seen across Europe, with
existing producers passing on higher costs to
consumers in a strong demand environment, but
recognizing that they would not be competitive as
far as adding new capacity was concerned.
Reinvestment economics for chemical projects in
the new volatile raw material price environment
dictates that in order to be competitive, one must
either have a rapidly growing end market to offtake products or a guaranteed integrated supply of
low-cost feedstock neither of which was
available to producers in the US or Europe.
This effectively limited chemical expansion to the
Middle East, which had a low-cost position in a
world of relatively high energy prices, and to
China, which had a large captive market.
52
Against this backdrop, the Middle East emerged

as the most important region for global chemical
investment, with exceptionally competitive
feedstock positions and opportunities to export to
growth markets in Asia. The region accounted for
well over 40% of basic chemical capacity
additions globally during 2000-11 (see table at the
top of the page), with strong export positions in
each of the product areas highlighted above.
Advent of shale gas in US

US gas prices have over the last few years fallen
vis--vis oil prices as supply has increased with
the advent of shale gas. This has resulted in a
move by operators to crack ethane where possible
resulting in a move away from naphtha and a
significant increase in the share of ethane within
US ethylene production (see chart at the top of the
next page). Furthermore, newly rediscovered cost
competitiveness and rising cash flows inevitably
bring about a desire to reinvest. Apart from
making existing US production competitive, shale
gas has also made the US attractive for Greenfield
cracker capacity investments for the first time
since the late 1990s.
The Saudi petrochemical sector is not impacted by
either the increased profitability in the US
petrochemical sector as well as the new Greenfield
capacity that is under consideration, in our view.
abc
Equities
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July 2014
Ethane based share of US ethylene production

75%
Ethane prices US vs. Saudi (USD/ton)

700
600
60%
500
45%
400
30%
300
200
15%
100
0%
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3
07 07 08 08 09 09 10 10 11 11 12 12 13 13
Q1'11
On the supply side, we believe the question of

market share competition between low cost ethane
based producers is misdirected. Low cost
producers run to optimize production capacity and
as long as they are offered a pricing umbrella by
higher cost naphtha based producers, both sets of
US vs. Middle East: EBITDA margin comparison

60%
Q1'13
Q3'13
Q1'14
Saudi Ethane
ethane based producers will be able to sell all of

their output. Low cost producers take market
share from high cost naphtha producers in an
environment where demand is weak, rather than
from each other.
The point to be made here is that, as long as cheap
US gas means that the US industry moves down
the cost curve, but does not move the curve itself
lower, the competitive position of other gas based
ethylene producers is unaffected. If cheap US gas
were to result in a downward shift in the entire
cost curve, then that would, of course, impact the
competitiveness and profitability of gas based
producers in the Middle East and in South East
Asia, and also the US.
Naphtha based ethylene capacity
(mn tons)
40%
30%
20%
10%
Q1'12
Q3'12
Q1'13
Westake Olefins
LyondellBasell - O&P Americas
Yansab
Source: Company reports
Q3'12
US Ethane
50%
Q3'11
Q1'12
The US ethane prices which are at their more than

a decade low levels of USD0.2-0.4/gal translate
into a price of cUSD150-300/ton vs. the
USD37/ton (USD0.75/mmbtu) paid by Saudi
producers. This differential, coupled with the
discount that Saudi producers enjoy on liquid
feeds (28% on propane and butane), means that
even a mixed feed producer in Saudi Arabia (such
as Yansab) is substantially more advantaged than
a mixed feed US producer (see chart at the bottom
of the page).
Q1'11
Q3'11
Q3'13
60%
180
160
140
120
100
80
60
40
20
0
50%
40%
30%
20%
10%
0%
1990 1995 2000
Naphtha based
Naphtha as a % of total
2005
2010 2015e
Total
53
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Equities
Saudi Arabia
July 2014
For the entire cost curve to move lower though,

one of two things would need to occur a) a
significant fall in crude prices or b) the US to add
enough new capacity to push some of the naphtha
based capacity out of the market and move the
marginal cost of production lower.
The second item would be a direct consequence of
lower US gas prices, so let us look at that in more
detail. The chart at the top of the previous page
shows the amount of naphtha based ethylene
capacity as a proportion of total global ethylene
capacity. As the chart suggests, this proportion has
been fairly stable at c50% and is likely to remain so
over the next few years. One of the reasons for this
is feedstock availability the decision to build an
ethylene cracker and its choice of feedstock is
based not just on price but on security of feedstock
supply. Given the relatively few sources of
stranded gas, the bulk of the global chemical
industry has been based around naphtha, in most
cases integrated into refining.
With regard to costs, the broad uniformity in crude
prices means that the naphtha based cost curve is
broadly homogenous, with some differentials based
on scale and integration. Hence, for new US
capacity to push the entire cost curve lower i.e.
move the marginal cost of production away from
naphtha to gas we calculate the US would need to
add capacity equivalent to c50% of the current
global installed base.
Even under the most optimistic scenarios, such an
influx of new US capacity appears highly
unlikely. Therefore, in our opinion, the US shale
gas revolution is unlikely to significantly alter the
competitive position of other gas based low cost
producers. For more details please see our March
2013 note Global Commodity Chemicals:
Beware of the supply side.
54
The road ahead for Middle

Eastern chemicals
Limited domestic opportunities driving
companies overseas
A recurring theme across our CEEMEA
chemicals coverage is the lack of domestic growth
opportunities for capacity expansion largely
driven by feedstock limitations. These limitations
span the gamut of companies that we cover in
CEEMEA, from SABIC in Saudi Arabia, to IQCD
in Qatar, to Petkim in Turkey, Sidi Kerir in Egypt
and also Sasol in South Africa.
At the same time, the existing domestic asset bases
of these companies are exceptionally profitable and
cash generative, given their cost- competitiveness.
On our estimates, the listed CEEMEA chemical
space is expected to generate over USD40bn in free
cash flows over the next three years.
All that cash flow, with limited room for domestic
reinvestment, implies that the chemical companies
in CEEMEA that are looking for growth
opportunities increasingly need to look at their
options overseas either through greenfield
investments or through M&A.
The big push into the US
The shale gas phenomenon in the US has meant that

CEEMEA-based companies starved of domestic
gas-based growth are increasingly looking to the US
as a potential base for capacity expansions.
Sasol is at the forefront of this push, planning
investment of cUSD20bn in the US, with two
large projects (Ethane cracker and GTL plant)
aimed at capitalising on cheap US natural gas.
SABIC is similarly looking to expand its
manufacturing footprint in the US and is considering
projects within all of its major gas- based business
lines methanol, fertilisers and the ethylene chain.
Unlike Sasol though, SABIC is not looking to
venture into the US on its own. The company
abc
Equities
Saudi Arabia
July 2014
believes that going it alone in the US would result in

execution risks and elongated timelines and also
higher costs resulting from investments in greenfield
infrastructure. The company would prefer to partner
with a producer that has an existing footprint, and
preferably with some integration into raw material,
which would help offset the risks of raw material
price volatility.
In January at the World Economic Forum in
Davos, SABICs CEO Mohammed Al Mady
stated that the company was in discussions with
several majors in the US and expected to make an
announcement around its entry into the market
sometime over the course of this year.
Other companies that are potentially looking at
opportunities in the US include Advanced
Petrochemical Company (APC) (which signed an
MOU with Vinmar in February 2013 to explore
US projects). However, given the ticket sizes
involved in greenfield US projects (upwards of
USD3bn), the number of CEEMEA companies
that can directly participate in the US is limited to
those with access to the most resources such as
SABIC, Sasol and IQCD, in our view.
M&A, consolidation
The Middle Eastern chemical names are the most
likely to participate in M&A and consolidation
moves to boost growth, in our view, as growth
options are limited on account of lack of
additional feedstock availability.
Inevitably, a lot of attention is focused around

deals that SABIC could potentially make given
its acquisitive history and growing cash pile. The
company has, in the past, stated that it is on the
look-out for opportunities to accelerate growth
within product chains such as acetyls,
polyurethanes and acrylics. Given the careful
consideration with which the portfolio gap
mapping and technology licensing programme has
been proceeding over the last three years, we see
any deals done by SABIC as likely to be small
(under USD10bn), technology-driven and focused
on product gaps.
That said, despite all the attention focused on
SABIC, one should not discount potential moves
made by the unlisted Middle Eastern companies
or even the smaller listed Middle Eastern names.
In the unlisted space, we have in the past seen
clear willingness to do deals. Examples include
IPICs acquisition of Canadian chemical
company, Nova, at the peak of the financial crisis
in 2008/09, and the failed USD18bn deal between
Kuwait Petroleums PIC unit and Dow Chemical
for Dows commodity chemical assets in 2008.
And Oman Oil just last year concluded a deal to
buy Oxea from Advent International. With some
of the global chemical majors Dow and DuPont,
for example under increasing pressure from
activist investors to optimise their portfolios, there
could be further asset spinoffs from the global
majors, with potential interest from the unlisted
MENA names.
Recent downstream Middle East chemical projects

Project
Sponsors
Cost
Location
Commercialisation timeline
PetroRabigh II Nylon, MMA, PMMA

Acetyls
Kayan Polycarbonates
Acrylics, SAP
Sadara PU, EO, PO, specialty PE
Kemya - Al Jubail Elastomers
Aramco and Sumitomo

Sipchem
SABIC
Dow, Tasnee, Evonik, Sahara
Aramco and Dow Chemical
SABIC and ExxonMobil
USD 7bn
USD 1.2bn
USD 12bn
USD 2.0bn
USD 20bn
USD 3.4bn
Rabigh, Saudi Arabia

Jubail, Saudi Arabia
2016
2011
2011/12
2014
2015/16
2015
Source: ICIS news, HSBC
55
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Equities
Saudi Arabia
July 2014
Aramcos chemical ambitions are also worth

highlighting in light of this discussion. The
company has a stated accelerated transformation
plan that aims to turn it into a global integrated
energy and chemical business by 2020. While
Aramco is investing in organic growth projects
USD20bn in Sadara, USD14bn in the Yanbu
refinery and USD7bn in PetroRabigh Phase II
with over USD1bn of daily revenues, there is still
considerable firepower available in our view
should it choose to pursue M&A as a route to
achieve its accelerated transformation plan.
The smaller (relative to SABIC) Middle Eastern
listed companies also have the potential to be
active in M&A. Tasnee, for one, has done deals in
the past Millennium Inorganics and Bemax
and it is notable that it is small and midcap assets
that are most ripe for industry consolidation, as
growth options are limited on account of lack of
additional feedstock availability. The proposed
Sipchem-Sahara merger, which has been now
cancelled, is unlikely to be the last of such deals
in the medium term, in our view.
The downstream imperative for

organic growth
As we highlighted in our September 2010 thematic
Beyond Cost: A roadmap for Middle Eastern
chemicals, the focus of the policymakers in the
Kingdom of Saudi Arabia is almost wholly on job
creation and the role that the petrochemical industry
can play within that framework by moving
downstream towards higher value-added products,
which can aid cluster development, manufacturing
and stimulate domestic employment.
Every single incremental feedstock allocation in
Saudi Arabia has riders around job creation and
product portfolio, with no more feedstock available
for projects that are simply based on exporting
commodity-grade chemicals. There does appear to
be incremental cheap feedstock available as
demonstrated by the extra ethane allocation for
56
SABICs Yanpet cracker. But that was clearly linked

to the progress of the companys rubber joint venture
with Exxon.
We see more of these investments as likely to occur
over the next several years with organic growth in
the Kingdom being driven primarily by the
downstream imperative. We also see potential for
the M&A strategies of companies being driven by
this requirement to move downstream, with the
potential to acquire assets that provide a unique
technology or product footprint that could then result
in favourable feedstock allocations that would drive
new organic growth within the Kingdom.
Move towards heavier fuels

Over the next five years or so we also expect a
significant increase in the cracking of heavier
feedstocks. The supply of ethane is fixed given
that the bulk of it is associated gas and linked to
OPEC production quotas. This has meant that
newer crackers have had to incorporate higher
proportions of heavier feeds such as propane and
butane rather than being pure ethane crackers.
Furthermore, as the Saudi industry moves towards
producing downstream chemicals and
complicated product chains, these require heavier
fuels as inputs.
We expect the split between light and heavier
fuels to average 50:50 going forward, a move
away from the historical predominance of lighter
fuels. We expect to see more of light naphtha,
condensates, raffinates and other refinery streams
being cracked across the region along with LPG.
For more details please see our January 2011 note
What price is right: Re-evaluating the feedstock
environment.
abc
Equities
Saudi Arabia
July 2014
Advanced Petrochemical
APPC AB, SAR49, N(V), TP SAR45
Company description
APC (formerly Advanced Polypropylene Company)
was incorporated in Saudi Arabia in 2005 to
develop an integrated polypropylene complex in Al
Jubail. The company went public in January 2007,
and the project started commercial operations in
August 2008 and the plant was formally
commissioned in November 2008.
APC is essentially a single-plant, single-product
company. It was initially set up with a
polypropylene capacity of 450ktpa, which was
further increased to 500ktpa in Q310 via a
debottlenecking project. The company uses
propane feedstock, supplied by Saudi Aramco, to
produce propylene, which is then converted into
polypropylene and sold under long-term volume
offtake agreements. It is the only company in our
MENA chems coverage with feedstock pricing
completely linked to crude oil prices, and as a
result its earnings have a high degree of
correlation on the PP-Naphtha spread.
Investment thesis
APC has announced three projects over the course of
the last 2 years : 1) an MoU with Bayegan to set up a
USD1bn PP plant in Turkey, which was announced
in May 2012 but subsequently cancelled in January
2013; 2) an agreement with Saudi Aramco Total
Refining and Petrochemical Company (SATROP)
for the supply of 50ktpa propylene, which was later
increased to 80ktpa, with a Q1 2014 start-up
timeline; 3) an MoU with Vinmar Projects to explore
and evaluate growth opportunities in the US, signed
in February 2013; and 4) MOU with SK Gas

company signed in March 2014 for a 600ktpa PDH
plant in South Korea.

Analyst
+ 971 4423 6924
Of these projects, the Turkish one has been

cancelled, the details of the potential projects with
Vinmar in the US remain vague, while the PDH
plant in Sout Korea is still in early stages of
discussion, leaving the propylene supply
agreement with Aramco/Total as the only growth
project in the pipeline.

This project is for the company to get additional

propylene and to use that to produce polypropylene
at the companys existing plant via debottlenecking.
However, in our view, this project is not hugely
accretive to earnings for APC.
APCs margins come from taking propane at a
discount from Aramco and converting it into
propylene and then PP. Buying finished propylene
at market prices from Aramco and then converting
it into PP would yield a conversion margin of 4-5%
at best, on our estimates, well below the companys
current 28% EBITDA margin. So, while this
propylene allocation is positive for tonnage, it does
not have a significant bottom-line impact, in our
view. The project was initially scheduled to start in
Q1 2014, but has been delayed.
57
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Equities
Saudi Arabia
July 2014
APC: Stock performance
APC: EBITDA (SARm) vs. PP spreads (USD/t)
220
300
200
800
250
180
700
200
160
140
120
150
600
100
500
50
100
400
80
Jul-12
Jan-13
APC
Jul-13
Tadawul All Share
Jan-14
Jul-14
Tadawul Petro
-50
Q2 08
Q2 09
Q2 10
Q2 11
EBITDA
Q2 12
Q2 13
PP - Naphtha (RHS)
Source: Company reports, IHS Chemical, HSBC
Valuation vs peers
Risks
In the absence of clarity on growth options, we

see the stock as fully valued at current levels. On
a 15.8x 2014e PE and offering a 5% yield, the
stock is trading at a premium to the broader Saudi
chemical sector, which is not justified given the
growth constraints, in our view.
Key upside/downside risks include:
Valuation
We use DCF to value APC. Our cost of equity is
10.8% and includes a risk-free rate of 3.5%, a market
risk premium of 6% and a beta of 1.22. We use a 4%
cost of debt assumption and a 30% debt weighting,
which yields a WACC estimate of 8.7%. This yields
a DCF valuation for APC of SAR45 per share which
is our target price for the stock.
Under our research model, for stocks with a
volatility indicator, the Neutral band is 10ppts
above and below the hurdle rate for Saudi stocks of
9%. At the time we set our target price, it implied a
potential return that was within the Neutral band;
therefore, we rate the stock Neutral (V). Potential
return equals the percentage difference between the
current share price and the target price, including
the forecast dividend yield when indicated.
58
300
Commodity prices: APC is highly leveraged to

PP prices. Any significant changes in the
correlation between PP and naphtha price
movements would constitute a risk to our
earnings estimates and valuation for the
company, either to the downside or the upside.
Operating rates: as a single-plant entity,

APCs earnings are highly sensitive to its
operating rates. Any significant outages
remain a key downside risk to our estimates
and rating on the company.
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Advanced Petro Chemical C

Year to
Valuation data
12/2013a
12/2014e
12/2015e
12/2016e
Profit & loss summary (SARm)

Revenue
EBITDA
Depreciation & amortisation
Operating profit/EBIT
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
2,786
773
-208
566
-15
557
557
0
557
557
2,996
738
-208
530
-12
521
521
-8
513
513
2,962
730
-207
524
-9
517
517
-8
510
510
2,831
689
-208
481
-6
478
478
-7
471
471
Year to
Cash flow from operations

Capex
Cash flow from investment
Dividends
Change in net debt
FCF equity
744
-110
-111
-328
-314
645
692
-128
-128
-407
-174
578
705
-133
-133
-407
-179
583
680
-139
-139
-380
-171
548
87
2,163
974
544
3,225
359
580
36
2,254
2,320
87
2,082
1,061
593
3,232
385
455
-138
2,360
2,252
87
2,009
1,097
634
3,194
383
317
-317
2,463
2,176
87
1,940
1,097
653
3,125
375
165
-488
2,553
2,095
12/2013a
12/2014e
12/2015e
12/2016e
2.9
10.5
3.5
14.5
3.6
8.0
4.6
2.7
10.8
3.5
15.8
3.4
7.1
5.0
2.6
10.7
3.6
15.9
3.3
7.2
5.0
2.7
11.0
3.6
17.2
3.2
6.8
4.7
Target price
(SAR)45.00
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price
Cash flow summary (SARm)
Intangible fixed assets

Tangible fixed assets
Current assets
Cash & others
Total assets
Operating liabilities
Gross debt
Net debt
Shareholders funds
Invested capital
Neutral (V)
(SAR)49.40
Reuters (Equity)
2330.SE
Market cap (USDm)
2,160
Free float (%)
47
Country
Saudi Arabia
Analyst
Sriharsha Pappu
53
53
48
48
43
43
38
38
33
33
28
28
23
23
18
2012
2013
Advanced Petro Chemical C
12/2013a
2014
18
2015
Source: HSBC
12/2014e
12/2015e
12/2016e
Note: price at close of 22 Jul 2014
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
Bloomberg (Equity)
APPC AB
Market cap (SARm)
8,101
Enterprise value (SARm)
7961
Sector
Chemicals
Contact
971 4 4236924
Price relative
Ratio, growth and per share analysis

Year to
8
.
9
12.7
42.2
63.3
69.7
69.7
7.5
-4.6
-6.4
-6.5
-7.9
-1.1
-1.0
-1.1
-0.6
-0.6
-4.4
-5.7
-8.2
-7.7
-7.7
1.2
23.9
25.9
17.6
27.8
20.3
52.5
1.6
0.0
2061.2
1.3
22.8
22.2
16.2
24.6
17.7
63.6
-5.8
-0.2
1.3
23.3
21.1
16.1
24.7
17.7
80.2
-12.9
-0.4
1.3
22.2
18.8
15.1
24.3
17.0
108.8
-19.1
-0.7
3.40
3.40
2.25
13.74
3.13
3.13
2.48
14.39
3.11
3.11
2.48
15.02
2.87
2.87
2.32
15.57
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Operating profit margin
EBITDA/net interest (x)
Net debt/equity
Net debt/EBITDA (x)
CF from operations/net debt
EPS Rep (fully diluted)
DPS
Book value
59
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Equities
Saudi Arabia
July 2014
Methanol Chemicals Co
(Chemanol)
CHEMANOL AB, SAR16.50, N(V), TP
SAR16
Company description
Methanol Chemical Company (Chemanol),
established in 1989 and initially known as Saudi
Formaldehyde Chemical Company, started
commercial operations in 1991 with production
capacity of 24ktpa of formaldehyde. Over the next
decade the company added capacity for
formaldehyde as well as other methanol
derivatives such as super plasticizers in small
increments, moving to a total sales volume of over
300ktpa by 2006.
In 2006 the company changed its name to Methanol
Chemical Company and embarked on a methanol
integration and expansion project after securing gas
feedstock from the Saudi Government. The plan
was to source methanol internally (rather than
purchasing it from SABIC at market linked prices)
Chemanol quarterly earnings (SARm)
and add some more formaldehyde capacity to boost

both volumes and margins. Chemanol went public
in August 2008 as part of the fundraising for the
expansion project.
Investment thesis
Still awaiting earnings recovery
Chemanol started commercial operations at its

231ktpa methanol plant in Q310 with a view to
expanding margins through feedstock integration,
but the expected margin improvement never
materialised. The company reported net earnings
of SAR11m in the 12 months following the plant
start-up, significantly lower than the average
annual earnings of SAR34m during the 2005-09
period as the weak operating performance and
start-up costs weighed on earnings. Earnings
stabilized slightly during Q311-Q312 (though
much below potential earnings), but have been
volatile since then.
Chemanol: stock performance
180
60
50
160
40
140
30
120
20
100
10
80
0
-10
Q1 10 Q3 10 Q1 11 Q3 11 Q1 12 Q3 12 Q1 13 Q3 13 Q1 14
-20
Net Income
Source: Company reports, HSBC estimates
60
Historical
Rebased
60
Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14
Chemanol
Tadawul All Share
Tadawul Petro

Analyst
+ 971 4423 6924
abc
Equities
Saudi Arabia
July 2014
We believe the company has not been able to take

full advantage of its backward integration into
methanol production owing to operational issues.
More importantly, in our view, it is difficult to
judge if and when these issues will be resolved.
If the plant operates at close to full capacity and is
able to take benefit of its methanol integration, we
think the business would start to look attractive at
a c11x annualised forward PE. However, based on
the most recent twelve-month period (Q312Q214), the stock trades at c20x.
Risk
In our estimates, we build in operating rates

of 95% for the company in 2013 and
thereafter. Any significant variation in the
operating rates would constitute a key risk to
our Neutral (V) rating on the stock, either on
the upside or downside.
Valuation
Our preferred methodology for valuing
commodity chemical companies is DCF. In our
DCF valuation we model cash flows and EBITDA
explicitly up to 2017, after which we build in
semi-explicit cash flow forecasts running off a
sales growth assumption and a profitability metric
through to 2020. Thereafter, we move to a
terminal valuation phase.
We use DCF to value Chemanol. Our cost of
equity for Chemanol is 10% and includes a riskfree rate of 3.5%, a market risk premium of 6%
and a beta of 1.08. We use a 4% cost of debt
assumption and a 30% debt weighting, which
yields a WACC estimate of 8.1%. This yields a
DCF valuation of SAR16 per share, which is our
target price.
volatility indicator, the Neutral band is 10 ppts
above and below the hurdle rate for Saudi stocks
of 9%.
At the time we set our target price, it implied a
therefore, we rate the stock Neutral (V). Potential
return equals the percentage difference between the
61
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Equities
Saudi Arabia
July 2014
Financials & valuation: Methanol Chemicals Co.

Year to
Valuation data
12/2013a
12/2014e
12/2015e
12/2016e

Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
874
279
-162
117
-37
78
78
-6
72
72
895
345
-167
177
-34
142
142
-7
135
135
851
328
-168
160
-28
130
130
-7
124
124
823
321
-172
148
-22
125
125
-6
119
119
Year to

Capex
Dividends
Change in net debt
FCF equity
252
-71
-77
-60
-115
179
301
-77
-77
-66
-159
227
308
-79
-79
-60
-169
231
301
-81
-81
-60
-161
223
18
2,260
489
79
2,793
143
1,066
988
1,583
2,546
18
2,169
489
83
2,702
139
912
829
1,652
2,455
18
2,079
486
97
2,609
136
757
660
1,715
2,350
18
1,988
479
103
2,511
135
603
500
1,773
2,248
12/2013a
12/2014e
12/2015e
12/2016e
3.4
10.6
1.2
27.6
1.3
9.1
3.6
3.1
8.1
1.1
14.8
1.2
11.5
3.3
3.1
8.0
1.1
16.1
1.2
11.8
3.0
3.0
7.7
1.1
16.8
1.1
11.3
3.0
Target price
(SAR)16.00
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Neutral (V)
(SAR)16.50
Reuters (Equity)
2001.SE
Market cap (USDm)
531
Free float (%)
60
Country
Saudi Arabia
Analyst
Sriharsha Pappu
22
22
20
20
18
18
16
16
14
14
12
12
10
10
8
2012
2013
Methanol Chemicals Co.
12/2013a
Source: HSBC
12/2014e
12/2015e
12/2016e
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
-5.1
-6.8
-14.1
-19.3
-21.1
2.4
23.7
52.0
82.1
86.5
-4.9
-4.7
-9.6
-7.9
-7.9
-3.3
-2.4
-7.4
-4.3
-4.3
0.3
4.2
4.6
3.7
31.9
13.4
7.6
62.4
3.5
25.5
0.4
6.7
8.3
6.1
38.5
19.8
10.2
50.2
2.4
36.4
0.4
6.3
7.4
5.7
38.6
18.8
11.8
38.5
2.0
46.6
0.4
6.1
6.8
5.4
38.9
18.0
14.9
28.2
1.6
60.3
0.60
0.60
0.60
13.13
1.12
1.12
0.55
13.69
1.03
1.03
0.50
14.22
0.98
0.98
0.50
14.70
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
62
Bloomberg (Equity)
CHEMANOL AB
Market cap (SARm)
1,990
2794
Sector
CHEMICALS
Contact
971 4 4236924
Price relative

Year to
3
.
0
2014
8
2015
abc
Equities
Saudi Arabia
July 2014
Saudi Basic Industries Co

(SABIC)
SABIC AB, SAR123.5, OW, TP
SAR130
Company description
SABIC is the largest and the most diversified
petrochemical company in the Middle East, with
products ranging from basic commodity chemicals
to differentiated commodities. It has interests in
fertilizers and steel, and is one of the largest
nitrogen fertilizer producers in Middle East,
although its steel and fertilizer business are small in
the context of the company (8% and 4% of its sales
respectively in 2012). SABIC unlike the other
petrochemical companies in the region has a global
footprint with significant assets outside MENA,
primarily in Europe due to its acquisitions of GE
Plastics (in 2007), Hunstsmans petrochemical
assets in UK (in 2006), and DSMs European base
chemical assets (in 2002).
Oil (LHS) vs. Revenue (USD/ton) and Margin (USD/ton)

120
1,400
100
80
60
40
SABIC has a significant leverage to rising chemicals

margins in our view. Its current profitability profile
is broadly the same as it was during the previous
sector peak in 2006/07. This is structurally the same
business, with similar leverage to sector cyclicality
as in the past. The impact of GE Plastics acquisition
on SABICs profitability profile is far smaller than
that indicated by the headline numbers, while the
feedstock mix of the company has not changed
significantly, despite the start-up of new mix-feeds
crackers (Yansab, Kayan).
SABIC: Earnings power (EPS in SAR)
14
13
10
800
600
2000 2002 2004 2006 2008 2010 2012

Oil (USD/bbl)
Revenue
Margin
fundamentals
1,000

Significant leverage to rising chemical
12
200

Analyst
+ 971 4423 6924
Investment thesis
1,200
400
20
SABIC was created in 1976 by royal decree to add

value to Saudi Arabias hydrocarbon resources,
especially the natural gas associated with its oil
production, most of which was previously flared
off. The Saudi government is the largest shareholder
in the company with a 70% stake.
10.6
8.5
7
4
2
0
Peak adjusted
Trough
Mid cycle
T12m
63
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Equities
Saudi Arabia
July 2014
The companys current EBITDA margins are in

the 28-30% range, below mid-cycle levels for
SABIC, which we estimate at 32-33%, while
peak-cycle margins are in the 40-41% range,
broadly unchanged from the 42-43% realised
during the previous peak in the chemical cycle.
On an earnings basis, we estimate mid-cycle
earnings for SABIC at SAR10.6 per share, with
peak earnings power of SAR13 per share.
SABIC is also not just an oil play, another
common investor perception. SABICs revenues
are indeed highly correlated to the oil price, but
realised margins are in fact less so, as seen in
2012 where, despite stable oil prices and flat
revenues, margins dropped significantly, driven
by weaker utilisation rates within the chemical
sector. In 2013, on the other hand, despite a 3%
decline in oil prices, the margin improved y-o-y.
Financials
SABIC reported Q2 net income of SAR6.45bn
broadly flat q-o-q and up 7% y-o-y. The Q2
earnings imply an annualized eps run rate of SAR
8.6 per share, c19% below our mid-cycle earnings
estimate of SAR10.6 for the company.
Valuation
Our preferred methodology for valuing
commodity chemical companies is DCF. In our
DCF valuation we model cash flows and EBITDA
explicitly up to 2017, after which we build in
semi-explicit cash flow forecasts running off a
sales growth assumption and a profitability metric
through to 2020. Thereafter, we move to a
terminal valuation phase.
Our cost of equity for SABIC is 12.3% and
includes a risk free rate of 3.5%, a market risk
premium of 6% and a beta of 1.47. We use a cost
of debt of 4% and a 30% debt weighting to get to
our WACC estimate of 9.8%. Our DCF valuation
gives a target price of SAR130.
64
Under our research model, for stocks without a

of 9%. At the time we set our target price, it
implied a potential return that was outside the
Neutral band; therefore, we rate the stock
Overweight. Potential return equals the
percentage difference between the current share
price and the target price, including the forecast
dividend yield when indicated.
Risks
Cyclicality: All of SABICs products are

commodity products, whose earnings are
inherently cyclical and driven by industry
operating rates and supply/demand
fundamentals. Although we would argue that
the cycle for each product is different and so
provides a degree of offset, there is no
denying that earnings are linked to global
GDP growth as well as being affected by
supply cycles for the products themselves.
Cash usage risks: SABIC is cash rich, underlevered, has an acquisitive history and is
growth constrained, making it a ripe
candidate for any M&A speculation within
the sector. Any low return or high cost
acquisition which does not add to the longterm value thus constitutes a risk to our
Overweight rating
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Saudi Basic Industries Co

Year to
Valuation data
12/2013a
12/2014e
12/2015e
12/2016e

Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
189,038
56,622
-14,031
42,591
-769
42,391
42,391
-2,300
25,228
25,228
203,993
63,898
-14,370
49,528
-545
50,182
50,182
-2,258
31,615
31,615
203,333
63,611
-14,768
48,842
-119
50,323
50,323
-2,265
31,955
31,955
200,779
62,625
-15,176
47,449
254
49,203
49,203
-2,214
31,244
31,244
59,997
-11,650
-18,039
-12,738
-16,001
44,888
62,197
-11,951
-11,951
-15,000
-18,937
49,047
62,979
-12,417
-12,417
-15,000
-19,459
48,963
62,693
-12,901
-12,901
-15,000
-19,047
48,292
22,197
165,874
144,025
75,189
345,588
52,526
69,864
-5,324
172,836
204,381
22,197
163,522
149,242
80,648
348,453
52,436
55,864
-24,784
189,791
201,878
22,197
161,247
151,025
83,195
347,961
52,199
39,364
-43,831
206,035
199,074

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Year to
12/2013a
12/2014e
12/2015e
12/2016e
2.5
8.3
2.3
14.7
2.4
9.8
4.0
2.2
7.1
2.2
11.7
2.1
10.7
4.0
2.1
6.8
2.1
11.6
2.0
10.7
4.0
2.1
6.6
2.1
11.9
1.8
10.6
4.0
Target price
(SAR)130.00
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price

Capex
Dividends
Change in net debt
FCF equity
Overweight
(SAR)123.50
Reuters (Equity)
2010.SE
Market cap (USDm)
98,784
Free float (%)
30
Country
Saudi Arabia
Analyst
Sriharsha Pappu
129
129
119
119
109
109
99
99
89
89
79
79
69
2012
2013
Saudi Basic Industries Co
12/2013a
2014
69
2015
Source: HSBC
12/2014e
12/2015e
12/2016e
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
Bloomberg (Equity)
SABIC AB
Market cap (SARm)
370,500
452408
Sector
CHEMICALS
Contact
971 4 4236924
Price relative
22,197
168,294
135,028
68,251
339,011
50,563
81,864
13,613
156,221
206,704

Year to
5
.
3
0.0
4.2
4.0
3.8
1.8
7.9
12.8
16.3
18.4
25.3
-0.3
-0.4
-1.4
0.3
1.1
-1.3
-1.6
-2.9
-2.2
-2.2
0.9
19.1
16.7
12.3
30.0
22.5
73.6
6.6
0.2
440.7
1.0
23.0
19.2
14.5
31.3
24.3
117.2
-2.4
-0.1
1.0
23.0
17.6
14.2
31.3
24.0
534.2
-10.3
-0.4
1.0
22.6
15.8
13.8
31.2
23.6
-17.1
-0.7
8.41
8.41
5.00
52.07
10.54
10.54
5.00
57.61
10.65
10.65
5.00
63.26
10.41
10.41
5.00
68.68
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
65
abc
Equities
Saudi Arabia
July 2014
National Industrializatio
(Tasnee (NIC))
NIC AB, SAR35.60, N, TP SAR35
Company description
Investment thesis
National Industrialization Company (Tasnee) is a

diversified industrial conglomerate with interests
in several industrial projects apart from its
petrochemical businesses. However, the major
petrochemical assets account for over 85% of the
companys revenues and are the key drivers of the
companys profitability.
We expect Tasnees earnings to increase by over

87% y-o-y in 2014 after the 28% and 37% declines
in 2012/13, on the back of improvements in TiO2
margins, scheduled start-up at the Acrylic acid plant
of the Saudi Acrylic Monomers Company (in which
Tasnee owns a c39% stake) and the start-up of the
ilmenite smelting plant of Cristal during 2014.
The petrochemicals segment is made up of

investments in Cristal (66% stake, TiO2), Saudi
Polyolefins (75% stake, polypropylene plant),
SEPC (45.3% stake, 1mtpa integrated ethylene
cracker), and SAMC (44.5%, integrated acrylics
plant, under construction).
However, we believe that the stocks recent strong

performance up 40% in the last 1 year largely
prices in the expectation of an earnings recovery
in 2014.
2014 to be better, but in the price
The manufacturing business consists of a number

of small scale battery, packaging and services
businesses and accounts for c15% of
Tasnees revenue.
Tasnee earnings profile (SARm) and net income margins

14%
3,000
12%
2,500
The TiO2 segment, which was the primary driver

of earnings growth for Tasnee in 2010 and 2011,
weakened significantly post H1 2012 on lower
demand growth, high producer inventory levels
and a margin squeeze from higher ore prices.
Tasnee: stock performance

80%
60%
10%
2,000
1,500
1,000
8%
40%
6%
20%
4%
500
2%
0%
0
2010
2011
2012
Net Income
66
TiO2 markets have troughed
2013
2014e
Margins (RHS)
0%
-20%
3m
Tasnee
6m
1 yr
Tadawul All Share
Source: Thomson Reuters DataStream, HSBC
2 yr
3 yr
Tadawul Petro

Analyst
+ 971 4423 6924
abc
Equities
Saudi Arabia
July 2014
Tasnee: Segment EBIT margins
TiO2 spreads (USD/ton)
40%
4,000
35%
30%
3,000
25%
20%
15%
2,000
10%
5%
0%
Q1 10 Q3 10 Q1 11 Q3 11 Q1 12 Q3 12 Q1 13 Q3 13 Q1 14
Industrial
Petrochemical
Source: Company reports, HSBC
While margins within Tasnees petrochemical

business remained relatively stable, the decline in
TiO2 margins from a high base had an outsize
impact on Tasnees profitability in H2 2012 and
H1 2013.We believe that the TiO2 segment has
troughed, with product prices beginning to
improve, while ore prices have already softened,
leading to expansion of product spreads (see
charts above).
New projects on track
Tasnee has 2 new projects starting this year

Acrylic acid: Tasnee has a c39% stake in Saudi
Acrylics Monomer Company (SAMC), an
integrated acrylic acid project with a nameplate
capacity of c250ktpa. The project started
commercial operations in July 2014.
Cristals slagger project: Cristal, Tasnees
TiO2 subsidiary is bringing on an ilmenite
smelting plant in H2 2014. The plant will
have an initial capacity to produce 500ktpa of
titanium slag by using ilmenite as a feedstock,
and will also produce 235ktpa of pig iron as a
by-product. The plant gives Cristal the ability
to use cheaper ilmenite ore instead of rutile,
by upgrading ilmenite to titanium slag, which
can then be used at its existing plants to
produce TiO2.
1,000
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
TiO2 - Rutile *1.07
TiO2 - Ilmenite *1.7
Source: Thomson Reuters Datastream, Bloomberg, HSBC
Financials
We expect Tasnees earnings to increase by 87% yo-y in 2014, compared to a 37% y-o-y decline in
2013. The stock is trading a 2014e PE of 11.5x on
our ahead of consensus estimates, at a premium to its
historical 12-m forward P/E multiple.
Valuation
We use a DCF to value Tasnee. Our cost of equity
is 11% and includes a risk-free rate of 3.5%, a
market risk premium of 6.0% and a beta of 1.25.
We use a 5% cost-of-debt assumption and a 30%
debt weighting. We use a 10% marginal tax rate
for the forecast period the Cristal business is
spread across various geographies and, thus, pays
a higher effective tax rate than the Saudi domestic
businesses which results in a WACC of 9.1%.
This yields a DCF value of SAR35 per share,
which is our target price.
volatility indicator, the Neutral band is 5pp above
and below the hurdle rate for Saudi stocks of 9%. At
the time we set our target price, it implied a
therefore, we rate the stock Neutral. Potential return
equals the percentage difference between the current
share price and the target price, including the
forecast dividend yield when indicated.
67
Equities
Saudi Arabia
July 2014
Risks
TiO2 margins: Tasnee has a large exposure to

TiO2 markets and a stronger/faster-thanexpected margin recovery is an upside risk to
our estimates and rating for the company
Project delays: SAMC (Saudi Acrylic

Monomers Company) is currently in the
construction phase. We assume a Q214 startup. Any delays would have a negative impact
on our valuation of Tasnee.
68
abc
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: National Industrializatio

Year to
Valuation data
12/2013a
12/2014e
12/2015e
12/2016e

Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
18,201
4,428
-1,359
3,069
-606
2,399
2,399
-122
1,104
1,104
20,338
6,271
-1,561
4,710
-559
4,380
4,380
-438
2,069
2,069
21,117
6,441
-1,749
4,692
-643
4,279
4,279
-471
2,044
2,044
20,890
6,407
-1,749
4,658
-522
4,366
4,366
-480
2,133
2,133
3,269
-3,045
-3,276
-1,140
2,892
-1,053
5,296
-2,166
-2,166
-1,138
-1,991
2,899
5,208
-1,433
-1,433
-1,022
-2,752
3,544
5,742
-1,059
-1,059
-1,066
-3,616
4,453
3,666
25,690
11,943
987
43,691
5,533
15,611
14,623
12,925
34,779
3,666
25,375
12,826
1,456
44,259
5,599
13,327
11,871
13,947
34,813
3,666
24,685
14,030
2,788
44,773
5,578
11,042
8,255
15,013
34,016

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Year to
12/2013a
12/2014e
12/2015e
12/2016e
2.8
11.4
1.5
21.6
2.0
-3.1
4.2
2.5
8.1
1.5
11.5
1.8
8.0
4.8
2.4
7.9
1.5
11.7
1.7
9.1
4.3
2.4
7.7
1.5
11.2
1.6
10.8
4.5
Target price
(SAR)35.00
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price

Capex
Dividends
Change in net debt
FCF equity
Neutral
(SAR)35.60
Reuters (Equity)
2060.SE
Market cap (USDm)
6,349
Free float (%)
80
Country
Saudi Arabia
Analyst
Sriharsha Pappu
47
47
42
42
37
37
32
32
27
27
22
22
17
2012
2013
National Industrializatio
12/2013a
2014
17
2015
Source: HSBC
12/2014e
12/2015e
12/2016e
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
Bloomberg (Equity)
NIC AB
Market cap (SARm)
23,813
50927
Sector
CHEMICALS
Contact
971 4 4236924
Price relative
3,666
25,086
15,989
5,179
47,133
5,596
21,793
16,614
11,993
33,966

Year to
1
.
7
1.7
-19.1
-25.1
-32.7
-37.4
11.7
41.6
53.4
82.6
87.4
3.8
2.7
-0.4
-2.3
-1.2
-1.1
-0.5
-0.7
2.0
4.3
0.6
8.9
9.2
6.2
24.3
16.9
7.3
84.9
3.8
19.7
0.6
12.3
16.6
9.8
30.8
23.2
11.2
65.3
2.3
36.2
0.6
12.0
15.2
10.0
30.5
22.2
10.0
47.2
1.8
43.9
0.6
12.0
14.7
9.8
30.7
22.3
12.3
29.5
1.3
69.6
1.65
1.65
1.50
17.93
3.09
3.09
1.70
19.32
3.06
3.06
1.53
20.85
3.19
3.19
1.59
22.44
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
69
abc
Equities
Saudi Arabia
July 2014
Saudi Industrial
Investment (SIIG)
SIIG AB, SAR37.4, OW(V), TP
SAR41
Company description
SIIG was one of the earliest privately held
petrochemical companies to be established in
Saudi Arabia, incorporated in 1996, and has been
publicly listed since 2004.
SIIG is essentially a combination of three
separate, but integrated petrochemical projects.
Saudi Chevron Phillips (SCP): A 50:50 JV
with Chevron Phillips Chemicals. SCP was
SIIGs first project and started operation in
2000. The plant produces motor gasoline
(789ktpa), benzene (835ktpa) and
cyclohexane (290ktpa).
Jubail Chevron Phillips (JCP): Another 50:50
JV with Chevron Phillips, JCP started
commercial operations in July 2009. The
plant is integrated into benzene from SCP and
produces styrene (550ktpa) along with
propylene (150ktpa).
Saudi Polymers Company (SPC): SIIG owns
a 32.5% stake in SPC via its 50% stake in
Petrochem. SPC is owned by a JV between
Petrochem and Chevron Phillips. The SPC
project is based around a 1.1mtpa ethylene
cracker and is integrated into styrene from the
JCP project, which will be used to produce
polystyrene (200ktpa). Its other major
products include HDPE (550ktpa), LDPE
(550ktpa) and PP (400ktpa).
70
Investment thesis
2014 to be better for Saudi Polymers
We view the operating issues that the Saudi

Polymers plant has had to date post its Q4 2012
commercial start-up, as primarily teething problems
that should start to dissipate over the course of
2014. Petrochem, the entity that owns 65% of the
Saudi Polymers (SPC) plant reported its first
quarterly profit in Q4 2013 on an estimated average
operating rate of c60% during the quarter. We
expect operations at SPC to stabilise over the
course of 2014 and estimate that the plant will
reach close to full utilisation rates by the end of the
year driving volume and earnings growth for both
Petrochem and in turn SIIG.
SIIGs older assets de-risk SIIG from operating
issues at Saudi Polymers
SIIGs older business, Saudi Chevron Phillips

(SCP) and Jubail Chevron Phillips (JCP)
substantially de-risk the company from the start-up
related risks at Saudi Polymers, in our view. SIIG
paid a dividend of SAR1per share last year, at c60%
pay-out ratio, despite a negative SAR33m
contribution from Saudi Polymers in 2013.
Nylon project on track
SIIG is constructing a new nylon and

compounding project in Jubail though PCC
(Petrochemical Conversion Company), a 50/50 JV
between SIIG and Arabian Chevron Phillips
Company. The project comprises a 50ktpa nylon
6,6 plant and compounding capacity of 170ktpa.

Analyst
+ 971 4423 6924
Equities
Saudi Arabia
July 2014
abc
The project appears to be on track, with the

company announcing 75% completion in early
Jan 2014, and subsequent trial run at some of the
compounding plants in early-Feb. We expect the
plant to start operations in H2 2014.
Financials
We expect SIIGs net income to roughly double in
2014, driven primarily by a positive contribution
from the Saudi Polymers unit.
Valuation
We use a sum-of-the-parts to value SIIG. We use
a 2014e PE multiple of 11x to value the exPetrochem (National Petrochemical Co.)
businesses, while to value the companys 50%
stake in Petrochem, we use our Petrochem target
price of SAR28. This yields a sum-of-the-parts
valuation for SIIG of SAR41 per share, which is
our target price for the stock.
of 9%. At the time we set our target price, it
implied a potential return that was outside the
Neutral band; therefore, we rate the stock
Risks
Saudi Polymers operating risks: Any further

significant delays in stabilisation of operations
at Saudi Polymers would have a negative
impact on our earnings estimates and constitute
a downside risk to our Overweight rating.
71
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Saudi Industrial Investment

Year to
Valuation data
12/2013a
12/2014e
12/2015e
12/2016e

Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
4,437
941
-787
154
-203
774
774
-103
714
714
8,027
2,888
-813
2,076
-231
2,893
2,893
-74
1,622
1,622
8,180
2,922
-884
2,039
-302
2,747
2,747
-70
1,549
1,549
8,921
3,229
-926
2,303
-322
2,897
2,897
-80
1,531
1,531
Year to

Capex
Dividends
Change in net debt
FCF equity
22
-1
556
-450
88
71
2,607
-290
229
-675
-2,172
2,318
2,520
-491
4
-675
-1,879
2,039
2,710
-503
-55
-675
-2,018
2,225
0
21,603
3,383
1,510
25,374
901
14,625
13,115
6,332
22,576
0
21,600
4,056
2,156
26,044
952
13,100
10,943
7,279
22,548
0
21,702
5,046
3,110
27,136
968
12,174
9,065
8,153
22,671
0
21,727
6,293
4,202
28,408
1,025
11,249
7,047
9,009
22,795
12/2013a
12/2014e
12/2015e
12/2016e
7.5
35.2
1.5
23.6
2.7
0.4
2.7
4.0
11.1
1.4
10.4
2.3
10.9
4.0
3.8
10.8
1.4
10.9
2.1
9.1
4.0
3.4
9.5
1.3
11.0
1.9
9.4
4.0
Target price
(SAR)41.00
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Overweight
(SAR)37.40
Reuters (Equity)
2250.SE
Market cap (USDm)
4,487
Free float (%)
80
Country
Saudi Arabia
Analyst
Sriharsha Pappu
45
45
40
40
35
35
30
30
25
25
20
20
15
2012
2013
Saudi Industrial Investme
12/2013a
Source: HSBC
12/2014e
12/2015e
12/2016e
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
417.2
318.2
30.7
80.9
206.8
1244.3
273.8
127.2
1.9
1.2
-1.8
-5.1
-4.5
9.0
10.5
13.0
5.5
-1.2
0.2
0.6
11.4
3.4
21.2
3.5
4.6
133.5
13.9
0.2
0.4
9.0
23.8
11.9
36.0
25.9
12.5
91.4
3.8
23.8
0.4
8.8
20.1
11.3
35.7
24.9
9.7
64.9
3.1
27.8
0.4
9.9
17.8
11.4
36.2
25.8
10.0
43.7
2.2
38.4
1.59
1.59
1.00
14.07
3.60
3.60
1.50
16.18
3.44
3.44
1.50
18.12
3.40
3.40
1.50
20.02
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
72
Bloomberg (Equity)
SIIG AB
Market cap (SARm)
16,830
32195
Sector
CHEMICALS
Contact
971 4 4236924
Price relative

Year to
9
.
6
2014
15
2015
abc
Equities
Saudi Arabia
July 2014
National Petrochemical
Company (Petrochem)
PETROCH AB, SAR37.4, N(V), TP
SAR28
Company description
Petrochem was established in April 2008 and
went public in August 2009 in an issue worth
SAR2.4bn. Petrochems sole asset is the Saudi
Polymers project, which is a JV between
Petrochem (65%) and Chevron Phillips (35%).
Saudi Polymers consists of a world scale cracker
(1.17mt ethylene + 0.45mt propylene), with
corresponding downstream units that include
HDPE (550ktpa), LDPE (550ktpa), PP (400ktpa),
Polystyrene (200 ktpa). Its feedstock mix consists
of Ethane (40%) and Propane (60%). The plant
was constructed at a total cost of SAR19.5bn and
started commercial operations in October 2012.
Saudi Industrial Investment (SIIG) is the largest
shareholder in Petrochem with a 50% stake.
Petrochem vs. SIIG stock performance
Investment thesis
Prefer SIIG on a risk-adjusted basis
SIIG owns a 50% stake in Petrochem, which in turn

own a 65% stake in the Saudi Polymers project.
Saudi Polymers is Petrochems only asset, while
SIIG has stable existing business (SCP and JCP) that
generated SAR1.65 of EPS in 2013 and allowed the
company to pay SAR1 per share in dividends.
Moreover, we believe SIIG has a better growth
profile than Petrochem, post the start-up at Saudi
Polymers, owing to its upcoming nylon project.
Petrochem vs. SIIG net income (SARm)

300
250
250
220
200
0
(100)
(200)
(300)
50
100
70
Aug-09
100
100
130
(400)
(500)
0
Aug-10
Aug-11
Petrochem
Source: Thomson Reuters DataStream, HSBC
Aug-12
Aug-13
SIIG
300
200
150
160

Petrochem clearly offers greater leverage to earnings

growth from Saudi Polymers (SPC) and we expect
the operating performance at SPC to improve
substantially in 2014. However, Petrochem also
offers greater exposure to the start-up risks inherent
in Saudi Polymers. Given earnings support from
existing business units, and a better growth profile,
we believe SIIG is a better risk-adjusted play on the
Saudi Polymers start-up than Petrochem.
280
190

Analyst
+ 971 4423 6924
Q1 12
Q3 12
Q1 13
SIIG
Q3 13
Q1 14
Petrochem (RHS)
Source: Company reports, HSBC
73
Equities
Saudi Arabia
July 2014
Financials
Petrochems Q214 net income was up 40% q-o-q,
compared to +89% increase in Q1, with the stock
trading at 21x based on annualized Q2 earnings.
Valuation
We use a DCF to value Petrochem. Our cost of
equity for Petrochem is 10.6% and includes a riskfree rate of 3.5%, a market risk premium of 6%
target price.
volatility indicator, the Neutral band is 10pp
of 9%. Although the stock is not volatile
according to the HSBC model (over 40% average
30-day vol), we keep the volatility (V) flag to
reflect the start-up risks inherent in the Saudi
Polymers project, which is Petrochems only
asset. At the time we set our target price, it
implied a potential return that was within the
Neutral band; therefore, we rate the stock Neutral
(V). Potential return equals the percentage
difference between the current share price and the
target price, including the forecast dividend yield
when indicated
Risks
Saudi Polymers ramp-up: As Saudi Polymers

is Petrochems only asset, a faster/slower than
expected ramp-up of operations would have a
positive/negative impact on our earnings
estimates and valuation for the company, and
represents an upside/downside risk
74
abc
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: National Petrochemical Co

Year to
Valuation data
12/2013a
12/2014e
12/2015e
12/2016e

Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
4,437
952
-787
165
-203
-38
-38
-38
-66
-66
8,027
2,888
-813
2,076
-231
1,845
1,845
-46
1,153
1,153
8,180
2,922
-884
2,039
-302
1,736
1,736
-43
1,085
1,085
8,921
3,229
-926
2,303
-322
1,981
1,981
-50
1,238
1,238
Year to

Capex
Dividends
Change in net debt
FCF equity
-38
0
0
0
-102
-46
2,536
-290
-290
-288
-1,952
2,245
2,553
-491
-491
-543
-1,520
2,063
2,753
-503
-503
-619
-1,630
2,249
0
18,369
2,520
673
21,006
804
14,625
13,952
4,121
19,413
0
17,847
3,323
1,330
21,291
873
13,331
12,001
4,985
18,966
0
17,454
3,373
1,341
20,948
889
11,822
10,481
5,528
18,596
0
17,031
3,655
1,462
20,808
946
10,312
8,850
6,147
18,278
12/2013a
12/2014e
12/2015e
12/2016e
7.5
35.0
1.7
4.0
11.2
1.7
14.3
3.3
11.0
1.7
3.9
10.8
1.7
15.2
3.0
9.8
3.3
3.4
9.5
1.7
13.3
2.7
10.3
3.7
Target price
(SAR)28.00
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
4.0
-0.2
0.0
Issuer information
Share price

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Neutral (V)
(SAR)34.40
Reuters (Equity)
2002.SE
Market cap (USDm)
4,402
Free float (%)
17
Country
Saudi Arabia
Analyst
Sriharsha Pappu
39
39
34
34
29
29
24
24
19
19
14
2012
2013
National Petrochemical Co
12/2013a
2014
14
2015
Source: HSBC
12/2014e
12/2015e
12/2016e
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
Bloomberg (Equity)
3569689Z AB
Market cap (SARm)
16,512
32464
Sector
CHEMICALS
Contact
971 4 4236924
Price relative

Year to
1
8
.
6
417.2
80.9
203.3
1154.7
1.9
1.2
-1.8
-5.9
-5.9
9.0
10.5
13.0
14.1
14.1
0.2
1.7
-1.6
1.6
21.5
3.7
4.7
251.2
14.7
0.4
10.5
25.3
9.6
36.0
25.9
12.5
169.9
4.2
21.1
0.4
10.6
20.6
9.5
35.7
24.9
9.7
127.6
3.6
24.4
0.5
12.2
21.2
10.9
36.2
25.8
10.0
92.9
2.7
31.1
-0.14
-0.14
0.00
8.59
2.40
2.40
0.60
10.39
2.26
2.26
1.13
11.52
2.58
2.58
1.29
12.81
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
75
abc
Equities
Saudi Arabia
July 2014
Yansab
YANSAB AB, N, TP SAR77
Company description
Yansab is essentially a single project company,
with a world scale cracker with 1.3mt ethylene
capacity, and corresponding downstream units. Its
main products include MEG (700ktpa), PP
(400ktpa), HDPE (400ktpa), and LLDPE
(400ktpa). Its feedstock mix consists of ethane
(35%) and propane (65%).
Yansab was set up in 2005 and had its IPO in
January 2006. The company started commercial
operations in Q1 2010. SABIC is the majority
shareholder with a 51% stake.
Investment thesis
Dividend growth to continue but upside priced in
The investment case for Yansab that of

continued dividend expansion as a growthconstrained single asset operator remains intact,
in our view.
Yansab stock performance
240
220
200
180
160
140
120
100
80
Jan-10Jul-10Jan-11Jul-11Jan-12Jul-12Jan-13Jul-13Jan-14Jul-14
Yansab
Tadawul Petro
Tadawul All Share
76
If anything, the move towards paying out c100%

of its earnings as dividends has been faster than
we expected. The dividend of SAR3 per share for
2013represented a c64% pay-out ratio, and the
SAR1.5 dividend for H114 implies a 72% payout ratio. We expect to see the dividend stream
continue to grow in 2014, ramping up to c100%
of earnings over the next 18-24 months given the
companys structural growth constraints and
strong cash flow generation.
However, given lack of growth and re-rating , we
view the dividend growth expectations as being
fully in the price.
Yansab is currently trading on a 2014e PE of 12.5x
and EV/EBITDA of 9.4x, while offering a 2014e
dividend yield of 5.7% and a FCF yield of 9.7%.
Yansab 12-month forward PE multiple
16
15
14
13
12
11
10
9
8
7
Jun-10
Jun-11
Jun-12
12m fwd P/E

Jun-13
Median
Jun-14

Analyst
+ 971 4423 6924
abc
Equities
Saudi Arabia
July 2014
Valuation
Risks
We use a dividend discount model to value

Yansab, as the method is appropriate based on our
view that Yansab will pay out all of its earnings as
dividends in the medium term, with the quantum
of dividends paid driving the value of the stock.
We use a dividend discount factor for Yansab

derived from the market-implied discount rate for
Saudi Arabian Fertilizer (SAFCO). SAFCO is the
closest comparable as both are low cost
producers, with limited growth options and will
act as a cash cow to the primary shareholder
SABIC. Given the comparable structures of both
companies, we believe the long-run dividend payout of each company should be discounted at the
same rate. Applying a market-implied SAFCO
discount rate to our estimates for Yansabs
dividends yields a fair value of SAR77 per share
which is our target price for the company.
Plant shutdown: Yansab is a single-project

company and highly sensitive to any
shutdowns. Any production problems would
hurt Yansabs earnings and represent a
downside risk to our Neutral rating.
Commodity prices: Any sharp increase in
crude oil prices and tightening supplydemand in commodity plastics and the
polyester chain represent upside risks to our
Neutral rating and vice versa.

and below the hurdle rate for Saudi stocks of 9%.
Our target price implies a potential return of 10%,
within the Neutral band; therefore, we rate the
stock Neutral. Potential return equals the
dividend yield when indicated
77
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Yanbu Petrochemical

Year to
Valuation data
12/2013a
12/2014e
12/2015e
12/2016e

Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
9,354
4,073
-1,080
2,993
-260
2,762
2,762
-118
2,645
2,645
9,711
4,435
-1,006
3,429
-157
3,302
3,302
-141
3,161
3,161
9,723
4,335
-1,016
3,318
-75
3,273
3,273
-139
3,134
3,134
9,522
4,186
-992
3,194
-25
3,199
3,199
-136
3,063
3,063
3,620
-106
-204
-561
-2,879
3,655
4,052
-194
-194
-2,250
-1,609
3,829
4,127
-293
-293
-2,821
-1,013
3,803
4,115
-397
-397
-2,910
-808
3,688
305
15,001
7,280
3,321
22,586
1,119
5,512
2,191
15,955
18,146
305
14,278
6,972
2,958
21,555
1,151
4,136
1,178
16,268
17,447
305
13,683
6,341
2,390
20,329
1,148
2,760
370
16,421
16,791

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Year to
12/2013a
12/2014e
12/2015e
12/2016e
4.6
10.6
2.3
14.9
2.6
9.3
4.3
4.3
9.4
2.3
12.5
2.5
9.7
5.7
4.2
9.4
2.3
12.6
2.4
9.7
7.2
4.2
9.5
2.4
12.9
2.4
9.4
7.4
Target price
(SAR)77.00
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price

Capex
Dividends
Change in net debt
FCF equity
Neutral
(SAR)70.02
Reuters (Equity)
2290.SE
Market cap (USDm)
10,501
Free float (%)
40
Country
Saudi Arabia
Analyst
Sriharsha Pappu

12/2013a
80
75
70
65
60
55
50
45
40
35
2012
2013
Source: HSBC
12/2014e
12/2015e
12/2016e
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
0.6
4.6
4.1
8.5
8.1
3.8
8.9
14.6
19.5
19.5
0.1
-2.3
-3.2
-0.9
-0.9
-2.1
-3.4
-3.8
-2.3
-2.3
0.5
14.9
18.9
12.8
43.5
32.0
15.7
25.3
0.9
95.3
0.5
17.8
20.4
14.6
45.7
35.3
28.2
13.7
0.5
184.9
0.5
17.9
19.5
14.5
44.6
34.1
57.7
7.2
0.3
350.2
0.6
17.9
18.7
14.7
44.0
33.5
170.8
2.3
0.1
1112.3
4.70
4.70
3.00
26.74
5.62
5.62
4.00
28.36
5.57
5.57
5.01
28.92
5.45
5.45
5.17
29.19
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
78
Bloomberg (Equity)
YANSAB AB
Market cap (SARm)
39,386
41577
Sector
CHEMICALS
Contact
971 4 4236924
Price relative
305
15,814
6,782
3,021
22,901
1,036
6,821
3,800
15,043
18,843
Yanbu Petrochemical
Year to
1
0
.
0
2014
80
75
70
65
60
55
50
45
40
35
2015
abc
Equities
Saudi Arabia
July 2014
Kayan
KAYAN AB, N, TP SAR16
Company description
The Saudi Kayan Petrochemical Company was set
up in 2005 with PMD, a private Saudi company,
as the original project sponsor. SABIC replaced
PMD in 2006 and the company held an IPO in
May 2007. SABIC is the majority shareholder of
the company with a 35% stake.
Kayan is the largest project built by SABIC. The
base complex is a world scale cracker with a
nameplate ethylene capacity of 1.3mt, integrated
along the olefins and benzene chains. Its main
prodcuts include: MEG (530ktpa), HDPE
(400ktpa), LDPE (350ktpa), PP (350ktpa),
Polycarbonate (260 ktpa). Kayans feedstock slate
consists of Ethane (35%) and Butane (65%).
The company announced in July 2010, that the
total cost of the integrated complex had exceeded
the initial estimates of SAR37.5bn by SAR9bn.
Saudi Kayan earnings profile (SARm)
1,000
Kayan started commercial operations at most of

its plants on 1 October 2011, while some of the
remaining plants are yet to start commercial
operations.
Investment thesis
Feedstock slate, depreciation and operating
Saudi Kayan started commercial operations at

most of its plants in October 2011, with the
exception of the LDPE unit, which started up in
April 2013. The company lost money in every
single quarter during Q4 2011-Q2 2013, with
cumulative losses of over SAR1.3bn. While
earnings have started to recover from H2 2013
onwards as operating performance has stabilised,
the project still has an overhang from its feedstock
slate and its high cost of construction.
Kayan has the heaviest feedstock slate of all of the
new Saudi crackers. The project has a significant
downstream chemical component, which requires a
higher proportion of butane (c70%) and less ethane.
Saudi Kayan vs Yansab: EBITDA margins
50%
800
40%
600
(100)
30%
400
(200)
20%
200
(300)
10%
(400)
0%
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
11 12 12 12 12 13 13 13 13 14
EBITDA
Net Income (RHS)

rates weigh on earnings
100

Analyst
+ 971 4423 6924
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
11 12 12 12 12 13 13 13 13 14
Yansab
Kayan
79
abc
Equities
Saudi Arabia
July 2014
Butane prices are linked to naphtha prices in

Saudi and thus do not enjoy the large discount that
ethane does. This means that a higher butane
content implies a lower cost advantage and lower
EBITDA margins, as seen in the EBITDA margin
comparison with Yanasb, which has a lighter
feedstock slate than Kayan.
Coupled with cost overruns and a heavy debt load,
this has meant that, for the plant to even hit
breakeven levels of profitability, it needs to
operate at a very high level of utilisation.
However, as operating rates ramp up over the
course of 2014, we expect the companys earnings
profile to improve.
Financials
Kayan reported a net loss of SAR133m in Q2
compared to an average net income of SAR20m
over the previous 3 quarters on account of higher
SG&A, feedstock costs and an inventory
revaluation, despite higher product prices and
volumes, confirming our view that the overhang
from heavy feedstock slate and high cost of
construction remains.
Valuation
We use DCF to value Kayan. Our cost of equity
for Kayan is 10.6% and includes a risk-free rate of
3.5%, a market risk premium of 6% and a beta of
1.19. We use a 6% cost of debt assumption and a
60% debt weighting, which yields a WACC
estimate of 7.7%.This yields a DCF value of
SAR16 per share, which is our target price.
within the Neutral band, therefore, we rate the
stock as Neutral. Potential return equals the
80
Risks
Saudi Kayans plants are, still in the ramp-up

phase. A faster-than-expected ramp-up
represents an upside risk to our Neutral rating.
Greenfield projects typically entail some

teething problems in the start-up phase. While
Saudi Kayan has faced these issues since its
start-up, further persistence of such issues
would have a negative impact on our earnings
estimates and valuation for the company.
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Saudi Kayan Petrochemical

Year to
Valuation data
12/2013a
12/2014e
12/2015e
12/2016e

Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
10,353
2,526
-2,291
235
-483
-256
-256
-90
-346
-346
11,715
4,484
-2,325
2,159
-466
1,703
1,703
-68
1,635
1,635
12,014
4,515
-2,325
2,190
-411
1,789
1,789
-72
1,717
1,717
12,373
4,854
-2,325
2,529
-411
2,127
2,127
-85
2,042
2,042
1,372
-729
-1,375
0
-28
640
4,283
-212
-212
0
-4,071
4,061
3,922
-439
-439
0
-3,482
3,472
4,130
-887
-887
-630
-2,612
3,232
0
37,096
8,270
2,603
45,365
2,652
27,615
25,012
15,728
40,110
0
35,210
9,775
3,939
44,985
2,701
25,469
21,530
17,446
38,345
0
33,772
10,453
4,378
44,225
2,702
23,295
18,918
18,858
37,145

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Year to
12/2013a
12/2014e
12/2015e
12/2016e
5.0
20.5
1.2
4.1
10.6
1.2
13.9
1.4
17.9
0.0
3.7
9.8
1.2
13.2
1.3
15.3
0.0
3.4
8.6
1.1
11.1
1.2
14.3
2.8
Target price
(SAR)16.00
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
1.6
2.8
0.0
Issuer information
Share price

Capex
Dividends
Change in net debt
FCF equity
Neutral
(SAR)15.10
Reuters (Equity)
2350.SE
Market cap (USDm)
6,039
Free float (%)
25
Country
Saudi Arabia
Analyst
Sriharsha Pappu
23
23
21
21
19
19
17
17
15
15
13
13
11
11
7
2012
2013
Saudi Kayan Petrochemical
12/2013a
2014
7
2015
Source: HSBC
12/2014e
12/2015e
12/2016e
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
Bloomberg (Equity)
KAYAN AB
Market cap (SARm)
22,650
47662
Sector
CHEMICALS
Contact
971 4 4236924
Price relative
0
39,208
6,380
269
45,588
2,772
29,352
29,083
14,094
42,546

Year to
6
.
0
9.2
34.0
13.2
77.5
816.9
2.5
0.7
1.4
5.1
5.1
3.0
7.5
15.5
18.9
18.9
0.2
0.7
-2.4
0.7
24.4
2.3
5.2
206.4
11.5
4.7
0.3
5.0
11.0
4.6
38.3
18.4
9.6
159.0
5.6
17.1
0.3
5.4
10.4
4.7
37.6
18.2
11.0
123.4
4.8
18.2
0.3
6.4
11.3
5.5
39.2
20.4
11.8
100.3
3.9
21.8
-0.23
-0.23
0.00
9.40
1.09
1.09
0.00
10.49
1.14
1.14
0.00
11.63
1.36
1.36
0.42
12.57
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
81
abc
Equities
Saudi Arabia
July 2014

(Sipchem)
SIPCHEM AB, SAR35.8, N, TP SAR34
Company description
Investment thesis
Sipchem was established in 1999 and went public in

2006. It has evolved in a fairly structured way,
starting with the basic chemicals projects (methanol,
BDO), then using those basic chemical streams to
develop downstream integrated projects (acetic acid,
VAM). The next phase of development is a planned
polyvinyl acetate (PVA) and ethylene-vinyl acetate
(EVA) facility that will be integrated into VAM
from the second phase.
Sipchem has near-term volume growth catalysts

in the form of its phase III start-up in H2 2014.
The phase III projects include a 100ktpa EA/BA
plant (which started commercial operations in
September 2013), a 200ktpa EVA/LDPE plant,
which is yet to start commercial operations, and a
63ktpa PBT plant which is under construction and
has a end-2014 start-up timeline.
Sipchem is best thought of as an integrated

petrochemical company with three phases, of
which phases I & II are operational, while most
plants of phase III have not yet started
commercial operational.
Phase I consists of a methanol (1,200ktpa)
plant and a butanediol (75ktpa) plant which is
integrated into the methanol capacity
Phase II consists of an integrated acetic acid
(460ktpa), VAM (330ktpa) and CO (345ktpa)
facility, with the acetic acid plant integrated
into methanol from Phase I and the VAM
plant integrated into acetic acid from Phase II
Phase III includes a100ktpa ethyl acetate
(EA)/butyl acetate (BA) plant (commercial
operations started in September 2013), a 200
ktpa ethylene vinyl acetate (EVA)/LDPE
project (yet to start commercial operations)
and a 63ktpa Polybutylene Terephthalate
(PBT) plant (under construction)
82
Impact of Phase III start-up
For its EVA/LDPE plant, the company has access

to low-cost gas (priced at USD0.75/mmbtu)
through an ethylene tolling arrangement with
SABIC. This arrangement, at current market
prices, is highly accretive and will result in an
earnings boost once the unit starts commercial
operations. The construction of the plant is
completed and we expect the plant to start
commercial operations in H2 2014.
Merger with Sahara stands cancelled
Sipchem and Sahara announced in June 2013 that

they were considering a merger and in December
the companies entered in a MOU to begin
confirmatory due diligence for their proposed
merger. As per the proposal Sahara would have
become a subsidiary of Sipchem, and shareholders
of Sahara would have received 0.685 shares of
Sipchem for every existing share of Sahara. As
per this existing shareholders of Sipchem would
have owned 55% of the combined entity with
existing Sahara shareholders owning the
remaining 45%. The merger was scheduled to be
completed in H1 2014.

Analyst
+ 971 4423 6924
Equities
Saudi Arabia
July 2014
abc
However in early- June 2014 the companies

announced that they were postponing the merger
as their mutually acceptable merger structure with
both companies continuing to exist while having
operational integration was difficult to implement
under the regulatory framework. The merger has
essentially been cancelled in our view.
Financials
Our full year estimates call for a 33% y-o-y increase
in earnings in 2014 after broadly flat earnings in
2013 and a 15% decline in 2012. The stock trades at
a 16x PE based on our 2014 estimates.
Valuation
We use a DCF to value Sipchem. Our cost of
equity for Sipchem is 10.0% and includes a riskfree rate of 3.5%, a market risk premium of 6%
target price.
the time we set our target price, it implied a potential
return that was within the Neutral band; therefore,
we rate the stock Neutral. Potential return equals the
dividend yield when indicated
Risks
A faster/slower-than-expected ramp-up in
production from new plants is a key
upside/downside risk
83
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Saudi International Petro

Year to
Valuation data
12/2013a
12/2014e
12/2015e
12/2016e

Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
3,959
1,707
-539
1,169
-192
991
991
-55
620
620
4,606
2,056
-549
1,508
-214
1,309
1,309
-79
824
824
5,308
2,243
-633
1,610
-214
1,412
1,412
-71
912
912
5,289
2,085
-633
1,452
-198
1,269
1,269
-63
820
820
1,249
-1,621
-1,621
-495
1,535
-619
2,159
-215
-215
-458
-965
1,652
2,157
-312
-312
-458
-827
1,561
2,085
0
0
-458
-493
1,823
193
11,714
4,405
2,881
16,313
1,525
6,758
3,877
6,160
11,907
193
11,394
4,559
2,784
16,146
1,690
5,834
3,050
6,614
11,672
193
11,126
4,044
2,257
15,363
1,731
4,814
2,557
6,975
11,376

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Year to
12/2013a
12/2014e
12/2015e
12/2016e
5.0
11.5
1.6
21.2
2.3
-4.2
3.5
4.1
9.1
1.6
15.9
2.1
11.1
3.5
3.4
8.1
1.6
14.4
2.0
10.3
3.5
3.4
8.5
1.6
16.0
1.9
12.0
3.5
Target price
(SAR)34.00
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price

Capex
Dividends
Change in net debt
FCF equity
Neutral
(SAR)35.80
Reuters (Equity)
2310.SE
Market cap (USDm)
3,500
Free float (%)
66
Country
Saudi Arabia
Analyst
Sriharsha Pappu
39
39
34
34
29
29
24
24
19
19
14
2012
2013
12/2013a
Source: HSBC
12/2014e
12/2015e
12/2016e
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
0.9
3.4
2.8
0.4
3.2
16.3
20.4
29.0
32.0
32.9
15.2
9.1
6.8
7.9
10.6
-0.4
-7.0
-9.8
-10.1
-10.1
0.3
9.7
10.9
6.9
43.1
29.5
8.9
65.2
2.8
25.8
0.4
11.7
13.8
8.6
44.6
32.7
9.6
48.7
1.9
55.7
0.5
13.0
14.3
9.5
42.3
30.3
10.5
35.5
1.4
70.7
0.5
12.0
12.1
8.8
39.4
27.5
10.5
28.1
1.2
81.5
1.69
1.69
1.25
15.80
2.25
2.25
1.25
16.80
2.49
2.49
1.25
18.04
2.24
2.24
1.25
19.02
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
84
Bloomberg (Equity)
SIPCHEM AB
Market cap (SARm)
13,127
18799
Sector
CHEMICALS
Contact
971 4 4236924
Price relative
193
12,048
4,493
2,854
16,734
1,537
7,696
4,842
5,794
12,344

Year to
5
.
0
2014
14
2015
abc
Equities
Saudi Arabia
July 2014
Rabigh Refining and

Petro (PetroRabigh)
PETROR AB, Price SAR33.6, OW,
TP SAR45
Company description
History
PetroRabigh was commissioned initially as a basic

topping refinery in 1989. Its refining capacity was
expanded from 325Mbbl/d to 400Mbbl/d in 1998. In
2005, Aramco decided to upgrade and expand the
existing asset through a 50:50 JV with Sumitomo
Chemical Company. A 25% stake in the company
was then offered to the public via an IPO in Jan08,
with Aramco and Sumitomo each holding a 37.5%
stake thereafter. The total cost of the upgrade was
cUSD10bn, and the project was commissioned in
November 2009.
The refining capacity remained unchanged at
400Mbbl/d, while the petrochemical business was
given an ethane allocation of 95mmscfd from
Aramco and would be supplied with 900ktpa of
propylene from the refinery. The petrochemical
complex was anchored through a world-scale
cracker with ethylene capacity of 1,250ktpa.
Petrorabigh has two broad operating segments:
Refining: The refinery, post the upgrade, is less
skewed towards the negative margin fuel oil
business. However, with a large proportion of
product sales into the domestic market, a simple
product mix and significant marketing fees paid
to the parents, the refining segment, despite
accounting for c85% of total company
revenues, has been consistently loss making
since commissioning.
The petrochemical business, while accounting

for only 15% of total sales, is the segment that
is profitable, with exposure to the basic
commodity chemical chains (PE, PP and
MEG). The business has an exceptionally low
cost base given the high ethane content of its
feedstock, yet has struggled with consistency
in terms of operating rates.

Analyst
+ 971 4423 6924
Investment thesis
A multi-leg equity story
We view PetroRabigh as a multi-leg equity story

playing out over several phases in the 2014-16
timeframe. The issues that the company has been
facing have been: a) a loss-making refinery that
represents a heavy drag on profitability; b) a
chemical plant that while highly profitable in
theory has had significant operational problems,
mostly stemming from utility supply; and c)
uncertainty around growth, the value of
PetroRabigh 2 and the participation of the listed
entity in the project.
We believe that each of these issues is now being
addressed in a phased manner and the underlying
equity value is starting to crystallise.
The first phase was the new commercial
agreements announced on 15 Dec 2013,
which provided SAR1.3bn to net income, or
SAR1.5 in EPS. These new terms
significantly enhanced the profitability of the
loss-making refinery unit, moving it to cash
breakeven on our estimates.
85
abc
Equities
Saudi Arabia
July 2014
The second phase commenced with the

settlement reached with the utility provider
RAWEC on 1 Jan 2014. The settlement was
crucial as it addressed the root causes behind
the operational issues at the cracker. This
settlement started the phase for better
operations at the cracker and a turnaround in
chemical segment profitability evident in
the results in Q114. We expect this to
continue through the course of 2014.
The third phase commenced with the
announcement on 14 May 2014 that
PetroRabigh 2 refinery would be executed at
the listco level. Rabigh 2 has been under
construction and was being developed
directly by the founding shareholders.
Moving the project to the listco instead of at
founding shareholders level has multiple
benefits for minority shareholders.
Improves the economics of the refinery
currently c18% of the refinery slate that
comprises naphtha loses on average
USD5-6/bbl. This naphtha will now be
upgraded at Rabigh 2 to higher-value
chemical products.
Gives shareholders a stake in the
ethane allocation with Rabigh 2 being
executed at the listco level, shareholders
of the listed entity will benefit from the
inherent value in the 30mmscfd of ethane
allocated to the Rabigh 2 project.
PetroRabigh will be the only listed Saudi
petrochemical company with an
additional ethane allocation.
Gives shareholders a stake in growth
the lack of additional ethane has meant
that the Saudi chemical industry is
essentially viewed as ex-growth, with
companies that have meaningful growth
prospects. With Rabigh 2 moving to the
86
listco, PetroRabigh now becomes the

strongest growth story in the Middle
Eastern chemical space with the
potential to more than double aggregate
and saleable capacity by 2016.
Value creation on our estimates, the
NPV of Rabigh 2 is cSAR8.7bn, roughly
SAR10 per share. With the project now
being done at the listco level, this value is
being shared with the minority shareholders
of PetroRabigh, rather than just accruing to
the founding shareholders.
There are obviously execution risks related to
Rabigh 2 and investors will undoubtedly highlight
the fact that the turnaround of Rabigh 1 is still
very much a work in process.
That said, there is significant value, in our
opinion, in the additional ethane, the naphtha
integration and volume growth. While there will
most likely be a requirement for additional equity,
on our estimates the project would be accretive to
existing shareholders if financed at any debt ratio
above 40%, and significantly accretive on a pershare basis above the 60% debt component.
Petrorabigh is an HSBC GEMs Super 15 portfolio
constituent.
Valuation
We use DCF to value PetroRabigh. Our cost of
equity is 10.1% and includes a risk-free rate of
3.5%, a market risk premium of 6% and a beta of
1.1. We use a 5% cost-of-debt assumption and a
30% debt weighting to get to our WACC estimate
of 8.6%. This yields a DCF value of SAR38 per
share (for standalone Rabigh 1).
Given the announcement on 15 May 2014 that
Rabigh 2 will be executed at the listco level, we
incorporated the value of Rabigh 2 into our
estimates. Our NPV for the project is SAR10 per
share, and we apply a 30% discount to that
abc
Equities
Saudi Arabia
July 2014
PetroRabigh: Combined chemical capacities by phase (000 tons)

Rabigh 1
Ethylene
Propylene
MEG
PP
HDPE
LLDPE
PO
Benzene
LDPE
Polyether Polyols
Paraxylene
MTBE
Cumene
Phenol
Acetone
PET
Nylon-6
EPR
TPO
EVA
MMA
p-MMA
Acrylic Acid
SAP
PTA
1,250
900
600
700
300
600
200
Total
4,550
Rabigh 2
Total
424
80
120
1,340
424
384
275
170
420
75
75
15
70
86
50
80
60
700
1,250
900
600
700
300
600
200
424
80
120
1340
424
384
275
170
420
75
75
15
70
86
50
80
60
700
4,848
9,398
Source: Company data, HSBC
estimate to account for risks of project delays and

execution risks. We therefore add a SAR7 per
share value for Rabigh 2 to our SAR38 DCF value
for PetroRabigh yielding a value of SAR45 per
share, which is our target price for the stock.
and below the hurdle rate for Saudi stocks of
9.0%. Our target price of SAR45 implies a
potential return of 34%, above the above the
Neutral band; therefore we rate the stock as
Risks
Operating risks: PetroRabigh has faced
multiple operating issues in the past. A
continued persistence of such issues would
have a negative impact on our estimates and
valuation of the company.
Refining margins: The companys refining
segment has faced negative margins on a
persistent basis in the past. We expect
margins in the refining segment to improve in
2014 given the reduction in marketing costs
charged by the parent companies, Aramco
and Sumitomo. Any increase in marketing
fees, reversing this reduction, would have a
negative impact on our estimates and
valuation of the company.
87
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Rabigh Refining And Petro

Year to
Valuation data
12/2013a
12/2014e
12/2015e
12/2016e

Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
50,598
1,884
-2,197
-313
-297
359
359
0
359
359
54,036
4,560
-2,134
2,425
-265
2,424
2,424
0
2,424
2,424
53,763
5,552
-2,155
3,396
-236
3,437
3,437
0
3,437
3,437
51,970
5,470
-2,155
3,315
-208
3,392
3,392
0
3,392
3,392
-1,129
-106
16
0
1,112
-1,526
4,709
-178
24
-876
-3,913
3,639
5,400
-359
-109
-1,314
-4,033
4,765
5,545
-453
-203
-1,752
-3,617
4,807
208
24,680
18,093
3,332
45,167
14,251
20,353
17,020
10,466
25,397
208
22,828
19,777
5,175
44,750
13,901
18,163
12,988
12,589
23,737
208
21,099
20,731
6,602
43,724
13,425
15,973
9,370
14,229
22,010

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Year to
208
26,690
16,259
1,610
45,594
14,036
22,543
20,933
8,917
27,511
12/2013a
12/2014e
12/2015e
12/2016e
1.0
26.7
1.8
82.0
3.3
-5.2
0.0
0.9
10.2
1.8
12.1
2.8
12.4
3.0
0.8
7.6
1.8
8.6
2.3
16.2
4.5
0.7
7.1
1.8
8.7
2.1
16.3
5.9
Target price
(SAR)45.00
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price

Capex
Dividends
Change in net debt
FCF equity
Overweight
(SAR)33.62
Reuters (Equity)
2380.SE
Market cap (USDm)
7,852
Free float (%)
25
Country
Saudi Arabia
Analyst
Sriharsha Pappu
39
39
34
34
29
29
24
24
19
19
14
14
9
2012
2013
Rabigh Refining And Petro
12/2013a
Source: HSBC
12/2014e
12/2015e
12/2016e
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
-18.4
-33.6
-147.9
-26.5
-26.5
6.8
142.1
575.0
575.0
-0.5
21.8
40.0
41.8
41.8
-3.3
-1.5
-2.4
-1.3
-1.3
1.9
-1.2
4.1
0.8
3.7
-0.6
6.3
234.7
11.1
2.0
9.2
25.0
5.3
8.4
4.5
17.2
162.6
3.7
27.7
2.2
13.8
29.8
7.6
10.3
6.3
23.5
103.2
2.3
41.6
2.3
14.5
25.3
7.7
10.5
6.4
26.3
65.9
1.7
59.2
0.41
0.41
0.00
10.18
2.77
2.77
1.00
11.95
3.92
3.92
1.50
14.37
3.87
3.87
2.00
16.24
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
88
Bloomberg (Equity)
PETROR AB
Market cap (SARm)
29,451
46463
Sector
OIL & GAS
Contact
971 4 4236924
Price relative

Year to
3
3
.
8
2014
9
2015
abc
Equities
Saudi Arabia
July 2014
Maaden
MAADEN AB, N, TP: SAR38
Company description
The Saudi Arabian Mining Company (Maaden)
was formed to facilitate the development of Saudi
Arabias mineral resources. The company is
viewed as a vehicle for diversification in an
economy reliant on oil and petrochemicals.
Maadens objective is to engage in projects
relating to mining, including the development,
advancement and improvement of the industry, as
well as in mineral products and by products.
These activities exclude petroleum and natural gas
and their derivatives. Ma'aden's main projects are
gold, phosphate, aluminium, and infrastructure.
The gold business has been operational since the
inception of the company. The phosphate project
is a joint venture with SABIC, (which owns 30%)
and includes a phosphate rock mine, a
beneficiation plant, and a chemical complex
containing sulphuric acid and ammonia plants.
The aluminium project is a joint venture with
Alcoa, which has a 25.5% stake. It includes a
bauxite mine, an alumina refinery, an aluminium
smelter and a rolling mill. Maaden announced a
delay in commercial production at its aluminium
smelter. This was initially set for end of 2013,
brought forward to end Q2-2014 and has now
been delayed to September 2014. While in 2015
we expect to see the bauxite mine and alumina
refinery come on-line.
Investment case
We rate Maaden Neutral. Although Maaden is
one of a few companies with the ability to
generate value from Saudi Arabias natural

resources, this positive is offset by both short term
risks to the execution schedule of the Aluminium
project and long-term risks from the lack of detail
on the longer-term DAP projects. It is worth
noting that the projects currently running
represent SAR19 per share value in our SOPbased valuation, compared to the current share
price of SAR37.
Nicholas Paton*, CFA

Analyst
+ 971 4423 6923
Financials
Maaden Q2-14 earnings came in at SAR371m, a
major beat on consensus and our forecasts by
102% and 28%, respectively. Major
improvements on the operating level with EBIT at
SAR502m, up 161% qoq and 38% above our
estimate of SAR364m.
The company attributed the great results to an
increase in volumes and prices of DAP and
aluminum. Aluminium sales were SAR817m for
the quarter, up c100% from Q1-14. DAP
operating rates increased to 79% from 70% last
quarter and 64% in 2013.
Valuation
We value Maaden using a DCF-based sum-ofparts (SOP) valuation (we value each part using a
DCF), taking account of the debt allocated to each
individual project and Maadens stake in it. We
apply a uniform risk-free rate of 1.8%, an equity
risk premium of 12.5% and beta of 0.9 across the
different business units, giving us an 11.4% cost
of equity. The cost of debt is estimated at 4.0%.
Using an equity: debt structure of 80:20 for gold
89
Equities
Saudi Arabia
July 2014
and corporate, and 42:58 for phosphate and

aluminium, we arrive at WACCs of 9.9% for gold
and 9.0% for corporate and 7.1% for both
phosphate and aluminium. We assume an
unchanged terminal growth rate of 2.0% for both
Maadens phosphate and aluminium projects.
Based on the sum-of-the parts for the valuation
of each project, we arrive at our 12-month target
price of SAR38 per share.
volatility indicator, the Neutral band is 5
percentage points above and below the hurdle rate
for Saudi stocks of 9%. At the time we set our
target price, it implied a potential return that was
within the Neutral band of our model; therefore,
we rate the stock N. Potential return equals the
Risks
The key risks to our Neutral rating on Maaden are:
A reduction in the Saudi Arabian
governments subsidies on natural gas.
That Maaden will struggle to export DAP
without offering higher price discounts,
especially when Waad Al Shamal project
comes online.
The release of more details on longer-term
projects could give the market enough
visibility for their value to be reflected in the
stock price.
90
abc
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Maaden
Neutral
Year to
Valuation data
12/2013a
12/2014e
12/2015e
12/2016e

Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
6,047
957
1,019
1,976
-183
3,174
3,174
-55
3,252
3,252
7,585
1,658
1,876
3,534
-191
3,344
3,344
-66
4,396
4,396
11,766
3,200
1,882
5,083
-1,262
3,821
3,821
-85
5,286
5,286
13,184
3,631
1,888
5,520
-1,254
4,266
4,266
-103
5,824
5,824
1,538
-10,548
-7,528
0
10,931
-10,445
-2,335
-7,283
-7,283
0
7,550
-9,684
-622
-425
-425
0
-1,026
-1,132
1,386
-325
-325
0
-3,140
958
420
23,602
757
-2,359
32,503
2,207
33,545
35,904
20,234
24,931
420
22,144
2,121
-2,532
25,551
1,268
32,347
34,878
20,726
25,948
420
20,579
4,603
-590
26,369
920
31,148
31,738
21,530
25,273

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
420
18,196
7,180
4,389
63,231
5,618
32,743
28,354
19,760
15,789
12/2013a
12/2014e
12/2015e
12/2016e
4.2
26.5
1.6
10.6
1.7
345.3
0.0
8.3
37.7
2.5
7.8
1.7
-36.3
0.0
5.8
21.4
2.6
6.5
1.7
-3.4
0.0
5.0
18.0
2.6
5.9
1.6
2.8
0.0
Target price
(SAR)38.00
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price

Capex
Dividends
Change in net debt
FCF equity
Year to
(SAR)37.20
Reuters (Equity)
Market cap (USDm)
Free float (%)
Country
Analyst
1211.SE
9,175
36
Saudi Arabia
Nicholas Paton
44
44
39
39
34
34
29
29
24
24
19
2012
2013
Maaden
12/2013a
2014
19
2015
Source: HSBC
12/2014e
12/2015e
12/2016e
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
Bloomberg (Equity)
MAADEN AB
Market cap (SARm)
34,410
62590
Sector
Metals & Mining
Contact
+971 4 423 6923
Price relative

Year to
2
.
2
8.4
-65.3
12.2
107.2
198.1
25.4
73.3
78.9
5.4
35.2
55.1
93.0
43.8
14.3
20.3
12.1
13.5
8.6
11.6
10.2
0.4
11.8
17.2
5.6
15.8
32.7
5.2
113.4
29.6
5.4
0.4
17.0
22.0
7.2
21.9
46.6
8.7
147.4
21.6
0.5
19.5
25.8
17.1
27.2
43.2
2.5
149.7
10.9
0.5
21.0
27.6
20.8
27.5
41.9
2.9
141.4
8.7
4.4
3.52
3.52
0.00
21.36
4.75
4.75
0.00
21.87
5.72
5.72
0.00
22.41
6.30
6.30
0.00
23.28
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
91
abc
Equities
Saudi Arabia
July 2014
Saudi Arabian Fertiliser

Company (SAFCO)
SAFCO AB, OW, TP: SAR176
Company description
SAFCO is the largest fertiliser company in Saudi
Arabia; with a combined ammonia/urea capacity
base of 4.5mt. The company was set up in 1965 as
a JV between the government and the citizens of
Saudi Arabia. Initially, the government held a
51% stake in the company, while the remainder
was held by the private sector. Over the years, the
capital of the company has been increased several
times. At present, SABIC owns a 43% stake in the
company, while the remaining stake is held by the
private sector.
Yield play
SAFCO is essentially a yield play given its

limited growth profile and high dividend payout
ratio. SAFCO has been a cash cow for SABIC and
has paid out c90% of its earnings as dividends
since 2007. We expect the company to continue
with its high dividend policy as capacity growth
for the company is constrained by new gas
allocations, which we consider unlikely.
Financials
Investment thesis
SAFCO reported Q2 14 net income of SAR638m,

down 8% yoy on higher volumes but lower prices
for its products, namely urea, which is down
c16% yoy and 8% qoq.
Pure play on nitrogen fertilisers
Valuation
SAFCO is a nitrogenous fertiliser producer with a

capacity of 2.4mt of urea and 2.1mt of ammonia. Its
urea production is backward-integrated into its
ammonia capacity, with c66% of the ammonia
being consumed internally. Its feedstock prices are
fixed, making it a pure play on nitrogen fertilisers.
Dividend yield. We believe SAFCO is a

dividend yield-driven stock. The local Saudi
Arabian market is currently trading at an
average 2014e dividend yield of 4.6%. Given
SAFCOs high valuation metrics such as PE
and EV/EBITDA we do not believe it is likely
to rally to this level. However, we believe the
company can trade on a 7.0% dividend yield as
it has done historically. At a 7.0% dividend
yield SAFCO would trade at SAR176, which is
the basis for our price target.
Limited growth options
SAFCO is currently increasing its urea capacity

by 1.1mt, by using existing excess ammonia as
feedstock. The new capacity is expected to be on
line in Q1-2015. Further expansion options are
limited because new gas allocation for expansion
is unlikely, while SAFCO would be internally
consuming c93% of its ammonia production after
the current expansion phase is concluded.
92
DCF. In our DCF valuation we model cash

flows and EBITDA explicitly up to 2020,
after which we build in a terminal value
assumption running off a 1.0% sales growth

Analyst
+ 971 4423 6923
Equities
Saudi Arabia
July 2014
abc
assumption and profitability metric through

to 2020. Our cost of equity for SAFCO is
8.3% and includes a risk-free rate of 3.5%, a
market risk premium of 6.0% and a beta of
0.8. We use a 4.0% cost of debt assumption
and a 20% debt weighting, which yields a
WACC estimate of 7.4%. Our DCF valuation
for the company is SAR167.
volatility indicator, the Neutral band is 5
for Saudi stocks of 9%. At the time we set our
target price, it implied a potential return that was
above the Neutral band of our model; therefore,
we rate the stock OW. Potential return equals the
Risks
Nitrogen fertiliser prices
SAFCO has high structural leverage to nitrogen

fertiliser prices. Any reductions in urea or
ammonia prices would be key downside risks to
our Overweight rating on SAFCO
Operating rates
Any changes from the expected operating rates

constitute a key risk to both our earnings
estimates and our valuation of the company.
93
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Equities
Saudi Arabia
July 2014
Financials & valuation: Saudi Arabian Fertilizer

Year to
Valuation data
12/2013a
12/2014e
12/2015e
12/2016e

Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
4,240
3,171
-374
2,797
25
3,273
3,273
-112
3,160
3,160
4,413
3,461
-340
3,121
37
3,579
3,579
-96
3,483
3,483
5,349
4,188
-392
3,796
30
4,247
4,247
-114
4,134
4,134
5,357
4,249
-444
3,805
24
4,250
4,250
-114
4,137
4,137
3,085
-925
-925
46
1,414
2,064
3,482
-496
-496
37
-1,772
2,876
4,313
-604
-604
30
684
3,599
4,269
-643
-643
24
592
3,517
0
3,838
5,279
3,952
11,521
469
40
-3,912
10,406
4,696
0
3,922
4,877
3,269
11,644
569
40
-3,229
10,430
4,962
0
3,968
4,288
2,676
11,565
570
40
-2,636
10,350
5,010

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Year to
12/2013a
12/2014e
12/2015e
12/2016e
11.7
15.6
10.0
16.9
6.5
4.0
7.5
10.7
13.6
10.0
15.4
5.1
5.6
7.7
8.9
11.3
9.6
12.9
5.1
7.1
7.9
8.9
11.2
9.5
12.9
5.2
7.0
8.1
Target price
(SAR)176.00
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price

Capex
Dividends
Change in net debt
FCF equity
Overweight
(SAR)160.50
Reuters (Equity)
Market cap (USDm)
Free float (%)
Country
Analyst
2020.SE
14,264
35
Saudi Arabia
Nicholas Paton
181
171
161
151
141
131
121
111
101
91
2012
2013
Saudi Arabian Fertilizer

Year to
12/2013a
Source: HSBC
12/2014e
12/2015e
12/2016e
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
-14.9
-18.0
-20.6
-17.6
-18.3
4.1
9.1
11.6
9.4
10.2
21.2
21.0
21.6
18.7
18.7
0.2
1.5
0.2
0.1
0.1
0.9
57.3
36.9
32.4
74.8
66.0
0.9
62.9
37.3
33.2
78.4
70.7
1.1
76.5
39.7
35.7
78.3
71.0
1.1
74.3
39.8
35.6
79.3
71.0
-25.9
-0.7
-37.6
-1.1
-31.0
-0.8
-25.5
-0.6
9.48
9.48
12.00
24.81
10.45
10.45
12.33
31.22
12.40
12.40
12.65
31.29
12.41
12.41
13.03
31.05
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
94
Bloomberg (Equity)
SAFCO AB
Market cap (SARm)
53,500
47184
Sector
CHEMICALS
Contact
+971 4 423 6923
Price relative
0
4,320
3,368
2,140
9,460
587
0
-2,140
8,269
4,962
9
.
7
2014
181
171
161
151
141
131
121
111
101
91
2015
Equities
Saudi Arabia
July 2014
abc
95
abc
Equities
Saudi Arabia
July 2014

1H Saudi cement deliveries were down 2% yoy but we estimate
that sales in 2H could be up 10% yoy, as the construction

environment improves
But the companies continue to have significant inventory that may
be a burden on their working capital

Given this backdrop, we continue to be neutral on the Saudi
cement names, except for SACCO given planned expansions
Cement
Labour shortage
Over the past five years, the Saudi cement

industry has witnessed a dramatic change.
Demand has increased significantly in the
Kingdom, from 30m tons in 2008 to 55m tons in
2013, on the back of high government expenditure
and the young demographic of the country
requiring even more housing. The government has
tried to limit the impact of higher demand by
granting new cement licenses (together with the
all-important fuel allocation) as well as banning
exports and capping local prices.
In 2013, the Saudi government announced a plan

to organise the labour market. It first announced a
three-month amnesty for workers to amend their
legal status in the country. After that, the
government planned to start a large inspection and
enforcement campaign. In July, the government
extended the amnesty period to the Islamic New
Year in early November.
The government has generally been unwilling to

give the incumbent cement players additional fuel
allocations; rather it has allowed new players to
emerge in new locations. Hence the number of
cement players has gone from eight in 2007 to
fifteen today. This share the wealth policy helps
distribute the higher profits generated to a wider
range of people within the Kingdom, although it
has been frustrating for incumbents that would
like to, and have the ability to, increase capacity.
96
During the amnesty period, according to the

Economist, close to 1m foreign workers were
deported. At the same time, up to 1.2m people
corrected their visa status, and 1.6m work permits
were renewed.
Since the Islamic New Year (November 4, 2013),
the government has tightened its stance on
workers of illegal status. The state news agency,
SPA, quoted on November 19, 2013 the Interior
Minister as saying that 60,000 workers had been
deported over a period of two weeks, and that
more were expected to be.

Analyst
HSBC Saudi Arabia
+ 966 1 299 2100
abc
Equities
Saudi Arabia
July 2014
Impact on the sector

We did not see a noticeable impact on the sector
from labour shortage until November of last year
where local consumption was down 18% yoy,
which was also when the inspection and
enforcement campaign began. While demand has
improved in the second quarter, up 1% yoy, but a
few companies continue to report double digit
declines; namely Yamamah and Saudi Cement,
which as of June 2014 showed deliveries were
down 18% and 17% yoy, respectively. We believe
the labour situation will start to improve towards
the end of the year, with companies actively
looking to import new labour from abroad to
replace the labour that has recently been lost.
Quarterly cement deliveries
18
16
14
12
10
8
6
4
2
0
2012
2013
1Q
2012
2013
2Q
2012
2013
3Q
2012
Kingdom is investing in new roads and railroads

connecting cities, and most recently a metro in
Riyadh. Most recently an announcement was
made of an integrated transport system by the
Mayor of the Eastern Province linking Qatif to
Damamm and Bahrain. The USD16bn project
would include buses as well as trains. In Jeddah,
the USD12bn metro will take seven years to
complete according to the Jeddah Municipality,
but awards for these contracts are to take at least
one year and most likely wont begin construction
till 2016 at the earliest, similar to the Riyadh
metro project discussed below.
The USD22.5bn metro project, which was
awarded a year ago, began construction on April
3, 2014. According to Arab News, the 177km sixline metro project will cover five different areas
across Riyadh, and the Olaya station, designed to
cover 400,000 passengers daily, will cover an area
of 28,000sqm and will have shopping centers,
service facilities and car parks. There will be
three stations linking the King Abdullah Financial
District (KAFD) in Riyadh.
2013
4Q
For 2014, we estimate 3% growth in cement

consumption, which compares to the 4% growth
seen in 2013.
The construction market

We believe that the construction market is slowly
picking up after the downturn last year because of
a labour shortage.
In the 2014 budget, the Saudi government
announced plans to spend SAR855bn on schools,
hospitals, new roads and railways, and upgrades
of ports and airports. Looking at the table above,
construction and transport continue to make up
the lions share of projects underway. The
Projects in execution in Saudi Arabia as of June 2014

Sector
Budget (USDm)
Percentage
67,930
405,322
25,384
33,550
42,270
68,625
152,204
8,400
803,685
8%
50%
3%
4%
5%
9%
19%
1%
100%
Chemical
Construction
Gas
Industrial
Oil
Power
Transport
Water
Grand Total
Source: Meed projects
Inventories rising
Based on our data as of May 2014, clinker inventory
levels have reached 17 million tons, which is the
highest level ever recorded in the Saudi market. This
is due to lower demand, last years requirement that
cement companies import close to 10m tons, and a
government requirement that every company have
two months of demand. Looking at the companies
97
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Equities
Saudi Arabia
July 2014
that have excess inventories, Yanbu, Saudi, Najran,

Riyadh and Yamamah all have significant additional
clinker inventories.
Clinker inventory required as of May 2014 (000 tons)
Company Minimum Current Excess Inventory
inventory inventory
over as a % of
requireme
required deliveries
nt
Yanbu
Arabia
Al Safwa
Qassim
City*
Riyadh
Yamama
SCC
Eastern
Tabuk
Northern
Al Jouf
Hail
Southern
Najran
Total
1,000
676
327
567
292
567
1,067
1,663
600
300
517
267
267
1,167
893
10,167
2,033
828
82
477
550
1,306
1,702
2,684
595
336
914
482
622
1,527
2,421
16,559
1,033
152
-245
-90
258
739
635
1,021
-5
36
397
215
355
360
1,529
6,393
16%
9%
7%
29%
2%
21%
14%
28%
11%
23%
23%
18%
23%
11%
15%
Total
imports
748
1,410
110
14
471
677
1,028
281
400
188
999
420
6,746
Cement capacity in the region

Region
Company
Current capacity
(000s tpa)
New capacity (000s

tpa)
Expected online
Current Capacity
Utilization (2013)
Yanbu
Arabia
Al Safwa
Umm AlQurra
6,000
4,054
1,960
-
2,000
2016
108%
110%
95%
-
Central - north
Qassim
3,400
123%
Central - east
Central - east
Central - east
City
Riyadh
Yamama
1,750
3,400
6,400
1,900
1,740
-
Q2-14
2015
-
100%
93%
99%
East - central
East - central
SCC
Eastern
9,980
3,600
1,000
-
Q3-14
-
88%
85%
North
North
North
North
Tabuk
Northern
Al Jouf
Hail
1,800
3,100
1,600
1,600
1,600
-
Q2-14
-
82%
62%
84%
38%
South
South
South
Southern
Najran
Baha
7,000
5,355
-
1,500
1,600
May-14
2015
105%
83%
-
60,999
11,340
94%
West
West
West
West
Total
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Equities
Saudi Arabia
July 2014
Construction
According to MEED Projects data, projects worth
more than USD1.3trn are under active status and
more than USD200bn are under main Contract
PQ/Bid due to be awarded in 2014. In 2013, of the
USD126bn planned a total of USD66bn was actually
awarded, implying c50% award rate. Even after
applying a 50% discount to the unawarded projects
we still estimate that cUSD100bn worth of projects
are due to be awarded in 2014; this gives a sense of
the market: it is significant.
However getting paid on time remains a challenge
for contractors working on projects in Saudi
Arabia. Post the 2008 crisis, all the GCC
contractors concentrated on Saudi Arabia to
benefit from the spending surge. While this has
certainly provided sales growth, cash flow
generation has lagged earnings and sales growth
by a big margin. Given the nature of contracting
and procurement laws in Saudi Arabia,
contractors have witnessed significant payment
delays with account receivables rising as high as
144% of sales in 2013 for Al Khodrai, which has
operations only in Saudi Arabia.
According to www.arabnews.com (8 September

2013) Saudi Arabia plans to adopt a version of the
standard-form contracts recommended by the
International Federation of Consulting Engineers
(FIDIC) to replace the current law which was
adopted in 1976. According to Al Khodari
management (stated in the 2013 annual results
call), the new procurement law is with the
Consultative Council (Shuraa Council). The
Consultative Council has sent the final draft to the
Contractors Committee to review the final draft
and give any final input before the council
proceed with the approval process. Management
further stated in the results call that this should
serve as proof that progress is being made on this
and considers that the law will be enacted by the
end of 2014.
We do not believe this law will be introduced any
time soon, given the time consuming nature of the
Saudi legislative process, but if it were to be
introduced we estimate it could halve the level of
receivables for contractors operating in the Saudi
market, leading to a significantly better cashflows
and valuations.
99
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Equities
Saudi Arabia
July 2014
Yamamah Cement
Company
YACCO AB, Price SAR62, N, TP
SAR70
Company description
Located in the central region, Yamamah Cement is
the Kingdoms second-largest cement producer, with
capacity of 6.4mtpa. The company holds a 33%
stake in Cement Product Industry Co. Ltd. (CPI),
which produces cement bags (among other things).
Yamamah was asked to move its plant, which is
on the eastern side of Riyadh, to outside the city
limits in order to reduce pollution. The company
is waiting for the government to approve the grant
for the land to which the plant will be relocated,
after which it will build a new plant. Depending
on the additional gas allocation Yamamah may
receive from Aramco, it could increase its
capacity by a third according to management. At
the minimum, we believe we could see an
increase of c15% as a result of a more efficient
plant design. Management has stated that its
current land is very valuable and it could either
sell it or develop it. We expect an announcement
regarding the land plot and the move hopefully
sometime this year.
Investment thesis
The main reason for our Neutral stance on
Yamamah is our belief that numbers will be
disappointing this year. We expect volumes to fall
4% this year. Given that sales volumes are down
more than 20% in 1H2014, this implies a big
100
improvement, helped by the Riyadh metro project

and very weak comps in the fourth quarter (down
11%). EBIT falls by 10% on higher costs. In the
first quarter, the ex-depreciation raw material
costs were SAR91 per ton, most likely due to
imports that had a higher cost basis than the
companys own production. This should work its
way out of the system over the next few quarters.
In our valuation, importantly, we have included
some value to the land bank, which was
previously not included in our model. The
company will soon start the process of moving
from its current location inside the Riyadh city
limits. This will take some time, and we are
somewhat doubtful that it will mean an expansion
of capacity beyond the 10% the company has
been guiding. Any additional capacity would
require additional fuel from the government,
which we do not expect to materialize, at least in
the near term.
However, we estimate that net value of the land
(SAR4bn minus the cost of the new plant of
SAR3.5bn) is SAR500m.
The company received a letter from the Ministry
of Petroleum and Mineral Resources on Thursday,
May 8, 2014, granting the company a license for
the exploration of the raw materials, limestone,
sand and clay in three locations outside the city of
Riyadh. Whichever one of these the company
chooses will be the new plant location.

Analyst
HSBC Saudi Arabia
+966 1 299 2100
abc
Equities
Saudi Arabia
July 2014
Financials
Yamamah reported Q2-2014 net income of
SAR207m, well above our SAR181m estimate on
higher investment income and the selling of some
shares. Net income was up 8% qoq but still down
29% yoy. Despite the beat on the net income line,
gross profit of SAR199m was almost exactly in
line with our estimate of SAR201m. As with net
income, gross profit was down 26% yoy but up
9.9% qoq. Part of the beat appears to come from
lower SG&A, as EBIT was SAR183m, compared
to our SAR190m forecast. But the main reason for
the beat is likely non-operating items. Sales of
SAR366m were flat qoq but down 20% yoy.
Valuation
Our DCF-based target price of SAR70 for
Yamamah uses a WACC of 9% which we
calculate using a risk-free rate based on the 12month SAIBOR rate of 1.8%. We obtain the cost
of debt by adding 220bp to the 12-month
SAIBOR, arriving at 4%. Our market risk
premium, based on a combination of relative
index returns, Saudi CDS spread and inflation
differential, is 12.7%. We use a beta of 0.9, which
is the average for various large international
cement companies.
In our DCF calculations, we assume a long-term
debt-to-equity ratio of 30:70 and a long-term
growth rate of 2.5%.
We also add the net value of the land (as
discussed above) at SAR500m. Given the
uncertainty over this value (4m sqm at SAR1,000
per sqm), we have used a discount of 40%. This is
similar to the discounts we use for real estate
companies in the region.

volatility indicator the Neutral band is 5pp above
and below the hurdle rate for Saudi Arabian
stocks of 9%. Our target price implies a potential
return of 13%, which is within the Neutral band,
so we rate the stock Neutral. Potential return
equals the percentage difference between the
Risks
Upside risks include:
The value of Yamamahs land could be more

than we expect, given its location in a
developing part of the city.
If demand returns strongly, Yamamah could
sell their inventory down, which would boost
the income statement and the cash balance.
Continued strong demand with prices
remaining at the ceiling beyond 2015 will
increase the company's long-term profitability.
Downside risks include:
Government relaxes import restrictions to ease

the supply shortages and pricing pressure.
New licensees start to operate earlier
than expected.
A further delay in the expansion, whose
timing will depend both on management
ability and additional fuel allocations.
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Equities
Saudi Arabia
July 2014
Financials & valuation: Yamamah Cement Company

Year to
Valuation data
12/2013a
12/2014e
12/2015e
12/2016e

Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
Neutral
1,542
1,016
-185
832
-4
856
856
-26
830
830
1,511
966
-183
783
-1
785
785
-24
761
761
1,474
900
-187
713
-1
715
715
-22
693
693
1,474
895
-170
725
-1
727
727
-23
705
705
Year to

Capex
Dividends
Change in net debt
FCF equity
822
-28
-258
-608
-30
766
930
-136
-136
-722
-202
790
885
-118
-118
-658
-42
764
878
-103
-103
-669
-115
771
17
1,758
1,839
1,254
4,263
224
31
-1,223
3,893
2,136
17
1,712
2,041
1,455
4,418
227
31
-1,424
3,931
2,087
17
1,643
2,089
1,497
4,397
235
31
-1,466
3,966
2,016
17
1,575
2,200
1,613
4,441
233
31
-1,582
4,001
1,947
12/2014e
12/2015e
12/2016e
6.9
10.5
5.0
15.1
3.2
6.5
4.9
6.9
10.8
5.0
16.4
3.2
6.7
5.8
7.0
11.5
5.2
18.0
3.2
6.4
5.3
7.0
11.5
5.3
17.7
3.1
6.5
5.4
Target price
(SAR)70.00
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price
12/2013a
(SAR)61.75
Reuters (Equity)
Market cap (USDm)
Free float (%)
Country
Analyst
3020.SE
3,334
78
Saudi Arabia
Patrick Gaffney
1
3
.
4
Bloomberg (Equity)
YACCO AB
Market cap (SARm)
12,504
10432
Sector
CONSTRUCTION
MATERIALS
Contact
+966 1 299 2100

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Price relative
73
73
68
68
63
63
58
58
53
53
48
48
43
43
38
38
33
2012
Yamamah Cement Company

Year to
12/2013a
12/2014e
12/2015e
12/2016e
-2.2
-3.9
-3.9
-1.1
1.6
-2.0
-4.9
-5.8
-8.4
-8.4
-2.5
-6.9
-9.0
-8.9
-8.9
0.0
-0.5
1.6
1.7
1.7
0.7
38.4
22.2
20.2
65.9
53.9
279.0
-31.4
-1.2
0.7
36.0
19.4
17.6
63.9
51.8
669.2
-36.2
-1.5
0.7
33.8
17.5
15.8
61.0
48.4
623.3
-37.0
-1.6
0.7
35.5
17.7
16.0
60.7
49.2
620.1
-39.5
-1.8
4.10
4.10
3.00
19.23
3.76
3.76
3.57
19.41
3.42
3.42
3.25
19.59
3.48
3.48
3.31
19.76
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS

DPS
Book value
102
Source: HSBC
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
2013
2014
33
2015
abc
Equities
Saudi Arabia
July 2014

(SACCO)
SACCO AB, Price SAR110.5, OW,
TP SAR130
Company Description
Located in the eastern region, Saudi Cement
(SCC) was established in 1955. SCC operates two
cement plants namely in Hofuf and Ain Dar,
which are 35km apart and are both about 120km
away from King Abdulaziz port in Dammam, in
which SCC owns and operates an export terminal.
The terminal enables it to load cement and clinker
to the ships at the rates of 800 tons/hr and 700
tons/hr, respectively. SCC transports its cement
and clinker to the terminal by railway wagons.
SCC is currently the largest cement producer in
the Kingdom, with capacity of at least c9mtpa,
this after restarting old production line which
added c2mtpa to its capacity. The lines were
shutdown due to an export ban, which resulted in
a massive inventory build-up to 2.6 million tons.
SCC cement is of a specialized nature that is well
suited to be used as finishing material alongside
normal use. This uniqueness allowed for its
cement to be sought after from across the region.
Financials
Saudi Cement reported 2Q2014 net income of
SAR288m, in-line with our estimate of SAR280m
and a beat on consensus estimates of SAR272m.
Net income was up 1% qoq, but still down 6%
yoy, with the beat coming from non-operational
items. Revenues of SAR538m were in line with
our estimate of SAR539m, and up 1% qoq, but
down 14% yoy.

Analyst
HSBC Saudi Arabia
+ 966 1 299 2100
Valuation
Our DCF-based target price of SAR130 for Saudi
Cement is based on a WACC of 9%.
The WACC is calculated using a risk-free rate
based on the 12-month SAIBOR rate of 1.8%. We
obtain the cost of debt by adding 220bp to the 12month SAIBOR, arriving at 4%. Our market risk
premium, based on a combination of relative
index returns, Saudi CDS spread and inflation
cement companies.
Investment thesis
In our DCF calculation, we assume a long-term

growth rate of 3%.
We expect some improvement in gross margin

yoy given the very good performance in 1Q2014.
The company is no longer importing clinker.
Gross margin suffered from 2Q2013 to 4Q2013
due to the higher cost of these imported products,
but we saw a strong reversal in 1Q2014.

volatility indicator the Neutral band is 5pp above
and below the hurdle rate for Saudi Arabian
stocks of 9%. Our target price implies a potential
return of 17%, which is above the Neutral band,
so we rate the stock OW. Potential return equals
103
Equities
Saudi Arabia
July 2014
the percentage difference between the current

Risks
SACCO could lose its additional fuel

allocation, which would lower capacity
utilisation and profits.
New plants could start to operate earlier than
expected.
Aramco could increase the cost of fuel for
cement companies.
104
abc
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Saudi Cement Company

Year to
Valuation data
12/2013a
12/2014e
12/2015e
12/2016e

Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
2,187
1,386
-200
1,186
-13
1,171
1,171
-47
1,124
1,124
2,214
1,392
-200
1,193
-13
1,190
1,190
-48
1,142
1,142
2,533
1,517
-188
1,329
-11
1,328
1,328
-54
1,275
1,275
2,554
1,530
-177
1,353
-10
1,353
1,353
-55
1,299
1,299
Year to
1,202
-57
-53
-1,071
54
1,222
1,329
-57
-55
-1,085
-384
1,226
1,457
-66
-63
-1,211
-99
1,332
1,474
-66
-64
-1,234
-173
1,344
0
3,151
1,071
398
4,310
183
661
263
3,263
3,640
0
3,029
1,176
396
4,292
203
561
165
3,325
3,606
0
2,918
1,276
495
4,279
203
486
-9
3,388
3,498
12/2013a
12/2014e
12/2015e
12/2016e
8.0
12.6
4.4
15.0
5.3
7.3
6.3
7.7
12.3
4.7
14.8
5.2
7.3
6.4
6.7
11.2
4.7
13.3
5.1
7.9
7.2
6.6
11.0
4.8
13.0
5.0
8.0
7.3
Target price
(SAR)130.00
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price

Capex
Dividends
Change in net debt
FCF equity
Overweight
(SAR)110.50
Reuters (Equity)
Market cap (USDm)
Free float (%)
Country
Analyst
3030.SE
4,508
67
Saudi Arabia
Patrick Gaffney
1
7
.
6
Bloomberg (Equity)
SACCO AB
Market cap (SARm)
16,907
17081
Sector
CONSTRUCTION
MATERIALS
Contact
+966 1 299 2100

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
0
3,293
986
113
4,371
199
761
648
3,208
3,967
Price relative
119
119
109
109
99
99
89
89
79
79
69
69
59
2012

Year to
12/2013a
12/2014e
12/2015e
12/2016e
-0.7
3.2
3.9
2.5
2.0
1.2
0.4
0.5
1.6
1.6
14.4
8.9
11.4
11.6
11.6
0.8
0.9
1.8
1.9
1.9
0.6
29.2
35.3
26.1
63.4
54.2
106.3
20.2
0.5
185.6
0.6
30.1
35.3
26.6
62.9
53.9
106.0
8.1
0.2
504.7
0.7
35.2
38.7
29.9
59.9
52.5
134.5
5.0
0.1
884.3
0.7
36.6
38.7
30.5
59.9
53.0
159.4
-0.3
0.0
7.35
7.35
7.00
20.97
7.47
7.47
7.09
21.33
8.33
8.33
7.91
21.73
8.49
8.49
8.06
22.14
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
2013
2014
59
2015
Source: HSBC
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
105
abc
Equities
Saudi Arabia
July 2014
Qassim Cement
QACCO, Price SAR97, N, TP
SAR101
Company Description
Located in the central region, Qassim Cement is
among the mid-sized cement producers in the
Kingdom, with annual clinker production capacity
of 3.0mtpa (but grinding capacity of 4.1m tonnes).
Qassims premium location, situated north of
Riyadh, allows it to distribute its product not only
into the central region, but also to Hail in the
North and Madina in the western province.
Investment thesis
The main reason for our Neutral stance on Qassim
is we expect revenues to be flat in 2014, but to fall
in 2015 due to higher competition in the northern
region. Qassim has been losing market share in
the Northern region to players like Hail Cement
(not covered) since Hail starting production at its
2mtpa plant in May 2013.
Financials
Qassim reported 2Q2014 net profit: of SAR161m
down a beat on our estimate of SAR153m by 5%,
but 2% yoy and up 1% qoq, EBIT of 164m was in
line with our estimate of SAR161m, but down 6%
yoy and up 1% qoq.
Revenues of SAR270m down 10% yoy and
missing our estimate of SAR276m by 2%. The
beat in earnings came from a decline in cogs and
an increase in other income (murabaha income).
.
106
Valuation
Our DCF-based target price of SAR101 for
Qassim uses a WACC of 9%, which is calculated
using a risk-free rate based on the 12-month
SAIBOR rate of 1.8%. We obtain the cost of debt
by adding 220bp to the 12-month SAIBOR,
arriving at 4%. Our market risk premium, based
on a combination of relative index returns, Saudi
CDS spread and inflation differential, is 12.7%.
We use a beta of 0.9, which is the average for
various large international cement companies.
growth rate of 3%.
On an EV/ton basis, Qassim trades at an EV/ton
of USD601, which appears relatively expensive
compared to the average of USD506 for all
thirteen cement stocks in Saudi.
volatility indicator the Neutral band is 5pp above and
below the hurdle rate for Saudi Arabian stocks of
9%. At the time we set our target price it implied a
potential return that was within the Neutral band, so
Risks
Continued strong demand, with prices

remaining at the ceiling beyond 2015 would
increase long-term profitability at the company.

Analyst
HSBC Saudi Arabia
+ 966 1 299 2100
Equities
Saudi Arabia
July 2014
abc
Government relaxes import restrictions to ease

the supply shortages and pricing pressure.
New plants could start operating earlier
than expected.
An unexpected increase in fuel costs
107
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Qassim Cement Company

Year to
Valuation data
12/2013a
12/2014e
12/2015e
12/2016e

Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
Neutral
1,051
693
-86
606
0
621
621
-36
585
585
1,054
695
-85
611
13
633
633
-36
597
597
964
605
-76
529
15
555
555
-32
523
523
1,006
628
-68
560
16
586
586
-34
552
552
Year to

Capex
Dividends
Change in net debt
FCF equity
646
-30
64
-540
-103
602
761
-63
-63
-567
-167
687
584
-48
-48
-497
-57
526
577
-50
-50
-552
-14
516
0
1,095
1,098
844
2,193
124
0
-844
1,997
1,225
0
1,074
1,257
1,012
2,331
231
0
-1,012
2,027
1,088
0
1,046
1,307
1,068
2,354
228
0
-1,068
2,053
1,057
0
1,029
1,328
1,083
2,357
231
0
-1,083
2,053
1,043
12/2014e
12/2015e
12/2016e
7.5
11.4
6.4
14.9
4.4
6.9
6.2
7.3
11.1
7.1
14.6
4.3
7.9
6.5
7.9
12.7
7.2
16.7
4.3
6.0
5.7
7.6
12.2
7.3
15.8
4.3
5.9
6.3
Target price
(SAR)101.00
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price
12/2013a
(SAR)97.00
Reuters (Equity)
Market cap (USDm)
Free float (%)
Country
Analyst
3040.SE
2,328
75
Saudi Arabia
Patrick Gaffney
4
.
1
Bloomberg (Equity)
QACCO AB
Market cap (SARm)
8,730
7718
Sector
CONSTRUCTION
MATERIALS
Contact
+966 1 299 2100

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Price relative
113
113
103
103
93
93
83
83
73
73
63
63
53
2012
Qassim Cement Company

Year to
12/2013a
12/2014e
12/2015e
12/2016e
0.3
4.1
4.6
4.7
9.9
0.3
0.4
0.7
2.1
2.1
-8.5
-13.0
-13.3
-12.5
-12.5
4.3
3.8
5.8
5.7
5.7
0.8
45.3
29.4
26.9
65.9
57.7
0.9
49.8
29.7
26.4
66.0
58.0
0.9
46.5
25.6
22.3
62.8
54.9
1.0
50.3
26.9
23.5
62.4
55.7
-42.3
-1.2
-49.9
-1.5
-52.0
-1.8
-52.7
-1.7
6.50
6.50
6.00
22.19
6.63
6.63
6.30
22.52
5.81
5.81
5.52
22.81
6.14
6.14
6.14
22.81
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS

DPS
Book value
108
Source: HSBC
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
2013
2014
53
2015
abc
Equities
Saudi Arabia
July 2014
Yanbu Cement
YNCCO AB, N, TP SAR 78
Company overview
Located in the western region, Yanbu Cement has
recently become one of the largest producers in
terms of capacity after adding a new fifth
production line in 2011 and securing fuel
allocation from Aramco in 2012, bringing their
total capacity to 6mtpa.
The company holds a 60% stake in Yanbu Al
Shuaiba Paper Products Company, a bag producer.
Investment thesis
We expect an increase in sales in the second half,
but given the very weak comps (3Q2013 was
down 4% and 4Q2013 was down 12%), we expect
the companys sales to improve as construction
picks up (as discussed in the sector section
above).We also believe that the construction
market in Jeddah and the Western Province is
improving after the slowdown last year.
Construction on Kingdom Tower, expected to be
the tallest building in the world, has started. Other
major projects include King Abdullah Medical
City, the railroad from Mecca to Madinah (going
through Jeddah) and the King Abdullah Economic
City, where activity has restarted.
Financials
The company reported 2Q 2014 net income that
was 4% better than we expected due to nonoperational items. On a year-over-year basis,
results were down double digits, with EBIT down
20%. However, quarter-over-quarter we are
starting to see improvement. Net income for
2Q2014 came in at SAR241m, down -12% yoy
but up 18% qoq and a beat on our estimate of

SAR232m. Gross profit SAR238m fell 19% yoy
and was below our estimate of SAR255m, but it
was up 7% qoq . The miss in gross profit was
most likely due to lower volumes than we
expected, and not due to higher COGS since
Yanbu has met the import requirements and hasn't
imported any clinker since Q12014. Yanbu
imported a total of 560,000 tons in 2013 and
188,000 tons in the first quarter of this year.
EBIT of SAR229m fell 20% yoy (but +8% qoq)
and missed our estimate of SAR244m by 6%.

Analyst
HSBC Saudi Arabia
+966 1 299 2100
Revenues of SAR446m missed our estimate of

SAR465m by 4% and were down 7% yoy and up
2% qoq.
Valuation
Our DCF-based target price of SAR78 for Yanbu
uses a WACC of 9%, which we calculate using a
risk-free rate based on the 12-month SAIBOR rate
of 1.8%. We obtain the cost of debt by adding
220bp to 12-month SAIBOR, arriving at 4%. Our
market risk premium, based on a combination of
relative index returns, CDS spread and inflation
cement companies.
growth rate of 3%.
volatility indicator the Neutral band is 5pp above and
below the hurdle rate for Saudi Arabian stocks of
9%. Our target price implies a 6.5% potential return
109
Equities
Saudi Arabia
July 2014
which is within the Neutral band; we therefore

reiterate our Neutral rating. Potential return equals
the percentage difference between the current share
Risks
Continued strong demand with prices remaining

at the ceiling beyond 2015 would increase the
companys long-term profitability.
Aramco could stop providing additional fuel

for Yanbu, which would hurt its market share.
New plant capacity in the Western region
could increase competition.
Aramco could start charging more for fuel.
110
abc
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Yanbu Cement Company

Year to
Valuation data
12/2013a
12/2014e
12/2015e
12/2016e

Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
Neutral
1,620
1,053
-206
847
-13
842
842
-16
821
821
1,653
1,070
-207
863
-21
848
848
-21
822
822
1,488
916
-207
709
-1
714
714
-18
692
692
1,474
903
-206
697
3
704
704
-18
683
683
Year to

Capex
Dividends
Change in net debt
FCF equity
828
-90
-90
-630
104
718
1,193
-83
-83
-779
-480
1,105
923
-74
-74
-655
-69
843
895
-74
-74
-646
-166
816
0
3,281
1,032
311
4,313
182
688
377
3,281
3,819
0
3,156
1,149
617
4,305
212
514
-103
3,322
3,476
0
3,024
1,039
529
4,063
210
357
-172
3,357
3,323
0
2,891
1,203
695
4,094
210
357
-338
3,391
3,189
12/2014e
12/2015e
12/2016e
7.4
11.3
3.1
14.1
3.5
6.2
5.4
6.9
10.7
3.3
14.1
3.5
9.5
6.7
7.7
12.4
3.4
16.7
3.4
7.3
5.7
7.6
12.4
3.5
17.0
3.4
7.0
5.6
Target price
(SAR)78.00
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price
12/2013a
(SAR)73.50
Reuters (Equity)
Market cap (USDm)
Free float (%)
Country
Analyst
3060.SE
3,087
59
Saudi Arabia
Patrick Gaffney
6
.
1
Bloomberg (Equity)
YNCCO AB
Market cap (SARm)
11,576
11473
Sector
CONSTRUCTION
MATERIALS
Contact
+966 1 299 2100

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Price relative
82
82
72
72
62
62
52
52
42
42
32
2012
Yanbu Cement Company

Year to
12/2013a
12/2014e
12/2015e
12/2016e
8.3
11.3
11.8
12.2
-24.0
2.0
1.6
1.9
0.7
0.1
-10.0
-14.4
-17.8
-15.8
-15.9
-0.9
-1.4
-1.8
-1.3
-1.3
0.4
22.0
25.0
18.6
65.0
52.3
83.4
11.4
0.4
219.9
0.5
23.1
24.9
19.6
64.8
52.2
51.3
-3.1
-0.1
0.4
20.3
20.7
16.6
61.6
47.7
1146.5
-5.1
-0.2
0.5
20.9
20.2
16.8
61.3
47.3
5.21
5.21
4.00
20.83
5.22
5.22
4.95
21.09
4.39
4.39
4.16
21.31
4.33
4.33
4.10
21.53
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
2013
2014
32
2015
Source: HSBC
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
-9.8
-0.4

DPS
Book value
111
abc
Equities
Saudi Arabia
July 2014
Abdullah A. M.
Al-Khodari Sons
ALKHODAR AB, Price SAR51, OW,
TP SAR44
Company description
Abdullah A. M. Al-Khodari Sons Company was
established in 1966 and was publicly listed in
September 2010. It is mainly involved in the
construction of roads, buildings and environmental
services such as waste management and city
cleaning. Al-Khodaris operations are limited to
Saudi Arabia and it derives more than 95% of its
revenues from the government sector.
Investment thesis
2013 saw Al Khodari perform well during the H1
only to give most of that back in the H2. The
stock price was influenced by Saudisation related
labour costs that led to a sharp decline in gross
margins. Going forward we think margins will
recover as labour issues subside and legacy
contracts with old pricing finish.
On the 1Q conference call, Al Khodari said that
while the exact framework and implementation of
any change in the procurement laws remain
uncertain, changes could take place by 2H. If they
were to be introduced, we estimate this could
halve the level of receivables for contractors
operating in the Saudi market, which could add
SAR58 per share to our SAR44 target price. We
believe the law is unlikely to be ratified any time
soon, but this represents significant option value
with Al Khodari stock. The stock is up 53.5%
year to date.
112
Financials
The 2Q14 net income of SAR7.9m was higher
than our estimate of SAR2.7m mainly due to
lower material and selling costs, but down -68.8%
from 2Q13 net income of SAR25.3m. Higher
material and manpower costs contributed to
decline in net profit when compared to last year.
The increased manpower costs were mainly due to
addition of 5,931 employees and work permit
costs for expatriate employees. The total contract
backlog reached to SAR3,223m at the end of
2Q14. Our core thesis on Al Khodari is for an
improving margin due to a tapering of issues
related to Saudisation and a declining proportion
of legacy contracts (those that pre-date the higher
labour costs). According to the company, this
improvement is still on track, and margin
recovery should start in 2H14.
Valuation
We use a DCF methodology to value Al Khodari
and our DCF uses explicit forecasts out to 2023
and terminal value assumptions thereafter. WACC
of 8.8% is derived from a risk-free rate of 1.8%,
representing the 12-month SAIBOR rate. The cost
of debt is derived by adding 100bp to the risk-free
rate while the market cost of equity is based on a
combination of relative index returns, CDS spread
and inflation differential to arrive at 12.7%. The
long-term beta is Bloombergs adjusted beta of
1.18. The debt/equity ratio is assumed to be 50:50
as we think Al Khodari will raise debt to finance
working capital requirements. We assume a longterm growth rate of 2.5%.

Analyst
+971 4423 6923
Equities
Saudi Arabia
July 2014
abc

volatility indicator, the Neutral band is 5ppts above
the time we set our target price it implied a potential
return above the Neutral band; therefore, we rate the
stock Overweight. Potential return equals the
Risks
Saudi labour reforms (Saudisation): Al
Khodari would experience severe margin
pressure in a scenario where the government
announced further labour reforms that
included higher levels or Saudisation or a
further increase in salary for Saudi nationals.
Abrupt slowdown in Saudi spending: Al
Khodaris new order volume will decline
significantly in the case of a spending
slowdown by the KSA government. Though
unlikely in the near term, this presents a risk
as Al Khodari derives more than 95% of its
revenues from the Saudi government sector.
113
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Abdullah A. M. Al-Khodari

Valuation data
Year to
12/2013a
12/2014e
12/2015e
12/2016e

Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
1,530
243
-145
97
-34
66
66
-2
64
64
1,597
277
-152
126
-42
99
99
-2
96
96
2,100
381
-199
182
-43
158
158
-4
154
154
2,499
473
-237
236
-46
212
212
-5
207
207

Capex
FCF enterprise
Dividends
Change in net debt
FCF equity

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
-65
-247
-278
-247
-27
325
-312
413
-240
200
-240
-27
-147
159
-82
-315
-373
-315
-27
424
-416
91
-325
-210
-325
-27
260
-256
568
2,576
218
3,176
1,483
1,265
810
2,116
655
2,593
364
3,280
1,483
1,119
880
2,039
771
2,840
-60
3,643
1,483
1,543
1,007
2,590
858
3,105
-320
3,996
1,483
1,803
1,187
3,031
(SARm)

Year to
12/2013a
12/2014e
12/2015e
12/2016e
0.4
-11.5
-28.4
-54.2
-52.4
4.3
14.3
29.0
49.3
49.3
31.5
37.4
44.5
60.0
60.0
19.0
24.2
29.9
34.6
34.6
0.8
4.9
8.1
3.3
15.9
6.4
7.2
156.1
5.2
0.8
5.9
11.4
4.2
17.4
7.9
6.7
127.2
4.0
36.9
0.9
7.7
16.3
5.6
18.2
8.7
8.9
153.2
4.0
0.9
8.2
18.9
6.6
18.9
9.4
10.2
151.9
3.8
5.1
1.21
1.21
0.50
15.25
1.81
1.81
0.50
16.56
2.89
2.89
0.50
18.95
3.89
3.89
0.67
22.35
Y-o-y % change
Revenue
EBITDA
EBIT
PBT
HSBC EPS

HSBC EPS
DPS
Book value
114
12/2013a
12/2014e
12/2015e
12/2016e
2.6
16.2
1.9
42.1
3.3
-11.7
1.0
2.4
13.7
1.9
28.2
3.1
5.9
1.0
2.0
11.1
1.6
17.6
2.7
-15.6
1.0
1.8
9.5
1.5
13.1
2.3
-9.6
1.3
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
(SAR)51.00
Reuters (Equity)
Market cap (USDm)
Free float (%)
Country
Analyst
Target price (SAR)
1330.SE
722
40
Saudi Arabia
Nicholas Paton
44.00
-13.7
Bloomberg (Equity)
ALKHODAR AB
Market cap (SARm)
2,709
3796
Sector
CONSTRUCTION &
ENGINEERING
Contact
+971 4 423 6923
Price relative
54
54
49
49
44
44
39
39
34
34
29
29
24
24
19
2012
2013
Abdullah A. M. Al-Khodari
Source: HSBC
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
Year to
Share price
Balance sheet summary
Overweight
2014
19
2015
abc
Equities
Saudi Arabia
July 2014
Saudi Arabian Amiantit

Co.
SAAC AB, Price SAR18.10, N, TP
SAR16.40
Company description
Established in Dammam in 1968, Amiantits core
business is the manufacture and sale of pipe
systems. The company serves the municipal, civil
engineering, industrial, energy and agricultural
markets. It generates 90% of its sales from pipe
manufacturing, over 50% of that in Saudi Arabia.
The division comprises almost 30 wholly-owned,
majority-owned or joint-venture manufacturing
facilities in 18 countries, with 11 of them in
Saudi Arabia.
Amiantit makes pipes from a variety of materials,
such as glass reinforced plastic (GRP), glass
reinforced epoxy (GRE), thermoplastic (HDPE,
PVC and PP), concrete, polymer concrete and
ductile iron. GRP is by far the biggest product in this
segment. The product range includes pipes and
accessories for water, sewage, hydro-power, gas, oil
services, construction, engineering, municipal,
industrial, agricultural and marine applications.
Investment thesis
Amiantit continues to see weak margins and
declining revenues. We believe that a recovery
may start in later half of 2014 as competitors are
forced to exit because of depressed margins, but
we remain Neutral on the stock pending any
actual signs of recovery.
Financials
Amiantit continued to see weak numbers in Q2
14. Net income for the quarter was down 20%
while for H1 14 was down 26%. Group top-line
also saw significant as sales revenue were down
14% in Q2 14 (down 16% in H1 14). The
management pointed to lower average diameter
mix in fibreglass sales as well as crackdown on
illegal labour in Saudi which hit construction
work for the weak growth.
Raj Sinha*
Head of EEMEA Research
+971 4423 6932
raj.sinha@hsbc.com
Valuation
We value Amiantit using a DCF model. The key
determinants of our WACC of 11.4% are: a riskfree rate based on the 12-month SAIBOR rate,
which is 1.8%; a cost of debt of 4%, which is
based on 12- month SAIBOR plus 220bp; and a
market cost of equity, based on a combination of
differential, which is 12.7%. We use a long-term
debt-to-equity ratio of 30:70 and a beta of 1.17.
We assume a terminal growth rate of 2%.
return above the Neutral band hence we have
Neutral rating for Amiantit. Potential return equals
115
Equities
Saudi Arabia
July 2014
Risks
Competition starts to exit the market owing to

unsustainable margins
Private sector projects pick up more quickly
than expected; and
The concrete piping division starts to break even
Spending in water-transmission piping comes

through later than expected;
Demand for steel piping in other segments is
slower than we forecast; and
European stabilisation proves unsustainable
116
abc
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Saudi Arabian Amiantit Co

Valuation data
Year to
12/2012a
12/2013a
12/2014e
12/2015e

Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
3,455
377
-114
263
-86
140
140
-45
111
111
3,131
296
-69
227
-87
137
137
-44
113
113
3,473
430
-118
312
-57
260
260
-83
167
167
3,614
453
-118
335
-74
276
276
-69
196
196

Capex
Dividends
Change in net debt
FCF equity

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Year to
-426
-115
-97
-115
732
-546
341
-100
-100
-115
-172
240
112
-108
-108
-142
-292
4
262
-116
-116
-166
-4
146
0
848
3,795
127
4,857
1,179
1,964
1,837
1,568
3,336
0
849
3,457
149
4,411
907
1,814
1,665
1,564
3,250
0
817
3,873
592
4,884
1,174
1,964
1,372
1,583
2,924
0
815
3,949
596
4,972
1,197
1,964
1,368
1,612
2,970
(SARm)
12/2012a
12/2013a
12/2014e
12/2015e
1.1
9.9
1.1
18.8
1.3
-29.0
5.5
1.2
12.3
1.1
18.5
1.3
12.0
5.5
0.9
7.6
1.1
12.5
1.3
0.2
6.8
0.9
7.2
1.1
10.7
1.3
7.7
8.0
Target price
(SAR)16.40
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price
Neutral
(SAR)18.10
Reuters (Equity)
Market cap (USDm)
Free float (%)
Country
Analyst
2160.SE
557
87
Saudi Arabia
Raj Sinha
23
23
21
21
19
19
17
17
15
15
13
13
11
11
9
2012
2013
Saudi Arabian Amiantit Co
12/2012a
2014
9
2015
Source: HSBC
12/2013a
12/2014e
12/2015e
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
Bloomberg (Equity)
SAAC AB
Market cap (SARm)
2,091
3279
Sector
Building Products
Contact
+971 4423 6932
Price relative

Year to
9
.
4
-3.0
-20.7
-18.8
-38.9
-26.4
-9.4
-21.4
-13.6
-1.9
1.1
10.9
45.1
37.0
89.2
48.1
4.1
5.3
7.6
6.4
17.3
1.2
6.0
7.0
2.1
10.9
7.6
4.4
107.2
4.9
1.0
4.7
7.2
2.0
9.5
7.3
3.4
98.4
5.6
20.5
1.1
6.9
10.6
3.8
12.4
9.0
7.6
79.9
3.2
8.1
1.2
8.5
12.2
4.2
12.5
9.3
6.1
77.7
3.0
19.1
0.97
0.97
1.00
13.59
0.98
0.98
1.00
13.56
1.45
1.45
1.23
13.72
1.70
1.70
1.44
13.98
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
117
abc
Equities
Saudi Arabia
July 2014
Saudi Steel Pipes

SSP AB, Price SAR35.3, N, TP
SAR37.50
Company description
Saudi Steel Pipes (SSP) was established by three
Saudi entrepreneurs and Hu Steel Pipe Company
of South Korea. SSP produces galvanised and
non-galvanised steel pipes, square and rectangular
pipes, and HFI (high-frequency induction) welded
steel pipe. It predominantly serves the regions oil
and gas and construction markets.
The company currently has production capacity of
160,000 metric tons of high-quality HFI welded
steel pipe. Its four lines produce pipes ranging in
diameter from half an inch to 16 inches.
Large-diameter pipes: SSPs HFI welding steel
pipe mill produces pipes with diameters ranging
from 6 inches to 16 inches.
Small-diameter pipes tubing: The other three
lines produce a variety of small diameter pipes,
including pipes for construction (scaffolding and
fence posts), conduits for electrical cables, pipes
for water, steam and compressed air, and chilled
water system pipes. The company can also
produce small-diameter pipes that are
zinc galvanised.
Investment thesis
SSP was one of the best performers in the Saudi
infrastructure space during 2013. The company saw
strong top-line growth of 16% during 2013, while
competitors saw falling revenues and shrinking
margins. In contrast, SSP saw a significant
improvement in profitability with the 2013
operating margin increasing by 2pp y-o-y. In our
118
note Saudi Infrastructure: Prefer SSP over Zamil

and Amiantit, 6 August 2013, we pointed out that
we thought SSP was best placed within the Saudi
infrastructure space to weather the headwinds from
oversupply and construction project delays because
it relies more on Aramco contracts, which are
generally more stable. However 2014 has been a
weak year for SSP as increasing competition from
international players as well as problems in
associate companies hit the margins.
Financials
SSP reported 38% drop in net income during Q2 14
with H1 14 net income seeing a significant 60%
drop as the groups profitability was hit by
increasing international competition as well as
problems in associates and increasing labour costs.
Valuation
We value SSP using a DCF model. The key
based on 12-month SAIBOR plus 220bp; and a
differential, which is 12.7%. We use a long-term,
We assume a long term growth rate of 2%.
of 9%. Our target price of SAR37.5 implies a
potential return of 6%, within the Neutral band,
hence we are Neutral on SSP. Potential return
Raj Sinha*
+ 971 4423 6932
raj.sinha@hsbc.com
Equities
Saudi Arabia
July 2014
abc
equals the percentage difference between the

Risks
Higher-than-expected order flow, especially

from Saudi Aramco
SSP being unable to increase capacity for smalldiameter pipes to cope with growing demand
Competition from seamless piping hurting
large-diameter sales
119
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Saudi Steel Pipes

Valuation data
Year to
12/2013a
12/2014e
12/2015e
12/2016e

Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
839
107
-24
83
-2
79
79
0
79
79
1,012
138
-27
111
-3
116
116
0
116
116
1,118
168
-33
135
-3
140
140
0
140
140
1,233
193
-38
155
-3
160
160
0
160
160

Capex
Dividends
Change in net debt
FCF equity

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Year to
56
-215
-222
-69
267
-167
154
-74
-74
-93
-369
64
181
-115
-115
-112
46
52
214
-62
-62
-128
-24
135
0
701
519
54
1,344
134
415
362
794
1,031
0
487
521
154
1,156
169
146
-8
840
685
0
568
473
108
1,198
183
146
38
868
750
0
592
490
132
1,247
201
146
14
900
750
(SARm)
12/2013a
12/2014e
12/2015e
12/2016e
2.4
19.0
2.0
22.7
2.3
-10.0
3.8
1.6
11.9
2.4
15.5
2.1
3.9
5.2
1.5
10.0
2.2
12.9
2.1
3.2
6.2
1.3
8.5
2.2
11.3
2.0
8.3
7.1
Target price
(SAR)37.50
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price
Neutral
(SAR)35.30
Reuters (Equity)
Market cap (USDm)
Free float (%)
Country
Analyst
1320.SE
480
35
Saudi Arabia
Raj Sinha
47
47
42
42
37
37
32
32
27
27
22
22
17
2012
2013
Saudi Steel Pipes
12/2013a
Source: HSBC
12/2014e
12/2015e
12/2016e
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
15.6
33.3
44.2
47.9
47.9
20.6
28.8
33.3
46.1
46.1
10.5
21.4
21.4
20.6
20.6
10.3
15.2
15.0
14.3
14.3
0.9
9.3
10.0
6.6
12.8
9.9
59.7
45.5
3.4
15.5
1.2
12.9
14.2
9.3
13.6
11.0
48.0
-0.9
-0.1
1.6
18.8
16.4
11.9
15.0
12.0
55.7
4.4
0.2
475.9
1.6
20.7
18.1
13.1
15.7
12.6
55.7
1.5
0.1
1542.7
1.56
1.56
1.34
15.57
2.28
2.28
1.82
16.47
2.74
2.74
2.20
17.02
3.14
3.14
2.51
17.65
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
120
Bloomberg (Equity)
SSP AB
Market cap (SARm)
1,800
1645
Sector
BUILDING PRODUCTS
Contact
+971 4423 6932
Price relative

Year to
6
.
2
2014
17
2015
abc
Equities
Saudi Arabia
July 2014
Zamil Industries
ZIIC AB, Price SAR60.75, N, TP
SAR48
Company description
Zamil Industrial Investment Company (ZIIC)
operates through four primary business units:
Zamil Air Conditioners, Zamil Steel Industries,
Zamil Glass Industries and Arabian Fibreglass
Insulation Co Ltd. The company sells its products
in more than 60 countries and has manufacturing
facilities in Saudi Arabia, United Arab Emirates,
Egypt, Austria, India, Vietnam and Italy. The
Zamil Air Conditioning (ZAC) division designs,
manufactures, tests, markets and services a
comprehensive range of air-conditioning products,
from compact room air conditioners and mini
splits to large-scale central air conditioners,
chillers and air-handling units for highly
specialised commercial and industrial
applications, marketed under various brand
names. ZACs factories are located in Dammam,
Saudi Arabia, for standard units and in Italy and
Austria for specialised units.
ZAC also produces branded air conditioners for
several international manufacturers, including a
joint venture with General Electric. Zamil Steel
(ZS) manufactures pre-engineered steel buildings
and various structural steel products, including
transmission towers. It manufactures a total of
250,000mt of fabricated steel a year for both lowand high-rise steel buildings and structures for
diverse uses, including storage for the oil and
gas industries.
ZSs main factories are in Dammam, Saudi

Arabia. Additional factories are located in Egypt,
Vietnam and Ras Al Khaima (UAE). The
insulation division is a much larger component of
revenues (10%) following the completion of the
merger with the Gulf Insulation Group,
consolidated from 1st January 2011 Zamil owns
51% of the merged entity.
Raj Sinha*
+971 4423 6932
raj.sinha@hsbc.com
Investment thesis
We see strong growth potential for Zamils air
conditioning division and estimate double digit
growth in 2015. However, in order to see further
upside in the stock, we believe the steel division
will also need to show revenue growth without
compromising margins. In the current market
conditions, this is difficult to predict, but we
believe the recent labour shortages will have
affected competitors who tend to hire more
temporary workers and, as a result, an
environment with better pricing power for Zamil
may arise.
Financials
Zamil reported 3% drop in revenues during Q2 14
with both air-conditioning and steel divisions
seeing marginal declines. However, operating
margins of the group saw 50bp improvement
thanks to improving margins in steel division
which we believe is due to dropping competition
in the sector.
121
Equities
Saudi Arabia
July 2014
Valuation
We value Zamil using a DCF model. The key
based on 12-month SAIBOR plus 220bp; and a
differential, which is 12.7%. We use a long-term
return within the Neutral band; hence, we have a
Neutral rating on Zamil. Potential return equals the
Risks
An improvement in steel division margins in

the near term; and
Stronger-than-expected growth in the air
conditioning market.
A fall in demand for prefabricated building

units in the commercial sector; and
Entry of competitors to the Saudi airconditioning market and probable
pricing pressure
122
abc
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Zamil Industries

Valuation data
Year to
12/2012a
12/2013a
12/2014e
12/2015e

Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
5,393
510
-146
364
-91
285
285
-41
201
201
5,414
540
-139
400
-86
287
287
-35
235
235
5,927
599
-161
437
-88
354
354
-35
268
268
6,196
649
-191
458
-80
383
383
-38
289
289

Capex
Dividends
Change in net debt
FCF equity

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Year to
311
-216
-211
-90
81
91
302
-191
-155
-90
-45
44
451
-190
-190
-134
-198
256
515
-198
-198
-173
-183
312
181
1,585
4,436
346
6,478
1,545
3,218
2,872
1,451
4,310
159
1,624
4,512
269
6,908
1,932
3,095
2,826
1,609
4,094
181
1,651
4,847
589
6,955
1,647
3,218
2,628
1,729
4,442
181
1,658
5,086
772
7,202
1,723
3,218
2,446
1,845
4,430
(SARm)
12/2012a
12/2013a
12/2014e
12/2015e
1.2
12.2
1.4
18.1
2.5
2.7
2.5
1.1
10.9
1.4
15.5
2.3
1.5
2.5
1.0
10.0
1.4
13.6
2.1
7.6
3.7
0.9
9.0
1.3
12.6
2.0
9.3
4.8
Target price
(SAR)48.00
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price
Neutral
(SAR)60.75
Reuters (Equity)
Market cap (USDm)
Free float (%)
Country
Analyst
2240.SE
972
80
Saudi Arabia
Raj Sinha

12/2012a
64
59
54
49
44
39
34
29
24
19
2012
2013
2014
64
59
54
49
44
39
34
29
24
19
2015
Source: HSBC
12/2013a
12/2014e
12/2015e
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
Bloomberg (Equity)
ZIIC AB
Market cap (SARm)
3,645
5997
Sector
BUILDING PRODUCTS
Contact
+971 4423 6932
Price relative
Zamil Industries
Year to
2
1
.
0
13.8
24.6
33.8
33.6
30.7
0.4
5.8
10.0
1.0
16.8
9.5
11.0
9.2
23.3
13.7
4.5
8.3
4.8
8.0
8.0
1.3
7.5
14.4
5.1
9.5
6.7
5.6
167.4
5.6
10.8
1.3
8.4
15.4
4.9
10.0
7.4
6.3
150.3
5.2
10.7
1.4
9.2
16.0
5.7
10.1
7.4
6.8
125.7
4.4
17.1
1.4
9.3
16.2
5.9
10.5
7.4
8.1
108.1
3.8
21.1
3.36
3.36
1.50
24.18
3.92
3.92
1.50
26.81
4.46
4.46
2.23
28.82
4.82
4.82
2.89
30.75
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
123
abc
Equities
Saudi Arabia
July 2014
Arabian Pipes Co.

APCO AB, Price SAR25, Not Rated
Company description
Arabian Pipes Co. (APC), which started production
in mid-1995, specialises in the manufacturing and
anti-corrosion coating of medium-range highfrequency welded (HFW) steel pipe, mainly for the
oil and gas and petrochemical sectors. APC is
among the largest manufacturers of HFW pipes in
the Middle East.
The main areas of application of products
manufactured by APC are: line pipe applications
used in the long distance transport of oil and gas,
structural applications used for general fabrication
and construction, general-purpose applications used
for industrial water, irrigation and distribution,
standard pressure applications used to transmit
different types of fluids, casting applications used
primarily for oil, gas and water well casings. Abdul
Kader Muhaidib and Sons Co. is the major
shareholder in the company with 13.8% stake.
Financials
APC reported FY2013 net income of SAR9.7m
compared to a net loss of SAR25m in FY2012
which according to the company was mainly on the
back of selling of Taqa investment for SAR56m.
The company saw loss at the operating profit line to
the tune of SAR17m as margins continued to
remain weak. During FY 2012, even though the
company had seen significant growth in top-line
which more than doubled, margins remained under
pressure and APC reported net loss of SAR25m.
The management has attributed the significant drop
to lack of projects in Jubail plant.
124
Recent news
On 17 Jul 2014, APC announced Q2 14
results. The company reported net loss of
SAR14m during the quarter compared to
SAR5m loss seen in Q2 13. Management
pointed to increase in cost of production as a
result of increase in raw material price for
some projects as the main reason for the
weaker performance. Furthermore no
dividends from associates were seen in Q2 14
compared to SAR6m in Q2 13.
On 4 May 2014, APC management
announced that the group won a SAR46m
contract for supplying 258km of welded steel
pipes to Saudi Aramco. The financial impact
of this project will be seen in Q3 2014
according to management.
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Arabian Pipes
Not Rated
Valuation data
Year to
12/2010a
12/2011a
12/2012a
12/2013a

256
34
14
-6
-8
4
4
0
-4
-4
Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
275
50
-2
9
-18
1
1
0
-7
-7
680
42
6
2
-25
-19
-19
0
-25
-25
383
16
32
-17
-25
21
21
0
10
10
103
-6
-6
0
-111
97
-57
-14
-14
0
57
-71
-135
-10
-10
0
143
-144
98
-5
163
0
-232
94
0
513
649
21
1,306
51
515
494
733
1,285
0
489
747
7
1,377
70
572
565
727
1,370
0
467
880
6
1,463
38
715
709
701
1,458
0
442
792
35
1,234
29
483
447
711
1,199

Capex
Dividends
Change in net debt
FCF equity

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
(SARm)
12/2010a
12/2011a
12/2012a
12/2013a
5.7
43.7
1.1
5.3
29.6
1.1
2.2
34.8
1.0
3.8
91.4
1.2
1.4
9.5
0.0
1.4
-7.0
0.0
1.5
-14.1
0.0
1.4
9.2
0.0
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price
Year to
(SAR) 25.51
Reuters (Equity)
Market cap (USDm)
Country
Analyst
Target price
2200.SE
272
Saudi Arabia
Not Rated
Bloomberg (Equity)
APCO AB
Market cap (SARm)
1,020
Sector
Building Products
Contact
Not Rated
Price relative
40
40
35
35
30
30
25
25
20
20
15
15
10
2012
10
2013
Arabian Pipes
2014
Rel to Tadawul
Source: HSBC

Year to
1
7
.
2
(SAR) Not Rated
12/2010a
12/2011a
12/2012a
12/2013a
-41.7
-58.8
-111.9
-85.7
-114.0
7.4
47.9
-250.9
-68.1
90.8
147.5
-14.9
-78.3
-43.6
-62.0
0.2
-0.3
-0.5
-0.3
13.1
-2.2
4.1
0.7
14.7
0.2
0.2
-0.5
-0.9
-0.5
18.1
3.1
2.8
0.8
11.4
-0.1
0.5
-1.7
-3.6
-1.7
6.2
0.3
1.7
1.0
16.8
-0.2
0.3
0.8
1.4
0.8
4.2
-4.5
0.6
0.6
27.9
0.2
-0.09
-0.09
0.00
18.33
-0.17
-0.17
0.00
18.16
-0.63
-0.63
0.00
17.53
0.24
0.24
0.00
17.77
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
125
abc
Equities
Saudi Arabia
July 2014
Middle East Specialized

Cables Co.
MESC AB, Price SAR16.5, Not Rated
Company description
Middle East Specialized Cables Company
(MESC), established in 1993, manufactures
industrial, instrumentation and process control
cables. It also makes power cables and control
cables, which include telephone computer cables,
specialized to transfer data and radio signals. In
2003, the company acquired a controlling stake in
Jordanian National Cables Company (JNCC)
publicly listed in Jordan to complete its product
range of low-voltage power cables. JNCC serves
the Jordanian and Saudi markets.
In May 2007, MESC started production of
medium-voltage power cables by establishing a
joint venture in Jordan with Fujikura Company.
MESC Fujikura Cable Company produces lowand medium-voltage power cables and began
commercial production at the beginning of 2009.
MESC generates significant revenues from Saudi,
Jordan and UAE markets. The companys clients
include oil & gas industry, industrial projects,
hotel, hospitals as well as commercial
establishments
126
Financials
During FY2013 MESC reported a drop of 1.5% in
net income which came in at SAR30.6m. During
the year the company saw 9.3% drop in gross
profits and 4.5% drop in operating profits.
Management pointed to drop in sales volumes on
the back of postponement of some orders from
EPC (Engineering, procurement and construction)
customers for the weaker gross profits during
the year.
Recent news
On 21 Jul 2014, MESC announced Q2 14
results. Net income for the quarter came in at
SAR10m compared to SAR0.02m in Q2 13.
According to management, increased sales
volumes as well as better margins were key
drivers of net income growth. Operating
income for the quarter came in at SAR17.85m
compared to SAR7.69m in Q2 13.
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Middle East Specialized Cable Co.

Valuation data
Year to
12/2010a
12/2011a
12/2012a
12/2013a

1,029
50
-45
6
-31
-119
-119
-2
-95
-95
Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
1,139
31
-51
-20
-39
-161
-161
0
-120
-120
991
101
-46
55
-41
8
8
0
31
31
931
95
-45
50
-41
24
24
-7
30
30
108
-63
-63
-42
29
46
-61
-37
-39
0
87
-97
97
-30
-30
0
-34
67
-51
-29
15
0
-187
-73
75
608
687
54
1,417
154
809
756
367
1,364
4
609
734
48
1,382
189
896
848
243
1,335
3
594
706
70
1,354
179
862
792
282
1,284
0
546
781
37
1,400
198
675
638
504
1,363

Capex
Dividends
Change in net debt
FCF equity

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Year to
(SARm)
12/2010a
12/2011a
12/2012a
12/2013a
1.6
32.3
1.2
1.4
53.0
1.2
2.1
4.6
4.2
3.2
-9.9
0.0
1.6
16.1
1.3
31.8
2.7
6.8
0.0
1.7
17.2
1.2
32.5
2.0
-8.1
0.0
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price
Not Rated
(SAR) 16.48
Reuters (Equity)
Market cap (USDm)
Country
Analyst
Target price
2370.SE
264
Saudi Arabia
Not Rated
Bloomberg (Equity)
MESC AB
Market cap (SARm)
989
Sector
Building Products
Contact
Not Rated
Price relative
25
25
20
20
15
15
10
10
5
2012
5
2013
MESC
2014
Rel to Tadawul
Source: HSBC

Year to
1
7
.
2
(SAR) Not Rated
12/2010a
12/2011a
12/2012a
12/2013a
-0.5
-66.9
-95.1
10.7
-39.0
-13.1
228.5
-6.0
-6.1
-9.9
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
-2.2
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
0.8
-7.0
-25.9
-6.7
4.9
0.6
1.6
2.1
15.0
0.1
0.9
-9.0
-49.5
-8.7
2.7
-1.8
0.8
3.5
27.6
-0.1
0.8
2.4
11.0
2.3
10.2
5.6
2.4
2.8
7.9
0.1
0.7
2.2
6.0
2.2
10.2
5.3
2.3
1.3
6.7
-0.1
-1.58
-1.58
0.69
7.90
-2.00
-2.00
0.00
5.22
0.52
0.52
0.00
6.06
0.51
0.51
0.00
8.40

DPS
Book value
127
abc
Equities
Saudi Arabia
July 2014
Saudi Cable Co.

SCACO AB, Price SAR12.4, Not
Rated
Company description
Saudi Cable Company (SCC) is a manufacturer of
power cables in Saudi Arabia founded in 1975 by
the Xenel Industrial Group. SCC manufactures
and sells power and telecom cables and
accessories. It also provides turnkey services for
the energy and telecom sectors. SCC operates a
fully integrated Jeddah power cable plant where it
produces its own copper rod, plastic (PVC) and
PE insulation compounds as well as its own
packaging materials.
SCC currently has a total production capacity of
more than 140k metric tons. SCC produces fibreoptic cables as well as power cables. It owns a
controlling interest in Mass Khablo, the Turkish
cable maker, and a non-controlling interest in
Bahrain-based Midal. The company also has a 79%
stake in Elmison, a Turkish producer of power
switches and accessories. The company also has
international trade office in Ireland and UAE.
Financials
During 2013, Saudi Cable Co reported 9% drop in
sales revenues. Losses widened and the company
reported a net loss of SAR229m in 2013
compared to SAR156m in 2012. Management
pointed to inadequate funding which was leading
to material disruption in the groups operations for
the weaker numbers.
128
Recent news
On 17 Jul 2014, SCC announced Q2 14
results. Net loss for the quarter came in at
SAR51m compared to SAR132m in Q2 13.
Management highlighted lower operating
expenses and lower provisions for doubtful
debts as drivers of a better performance yoy.
On 2 Jul 2014, SCC management announced
that the company will initiate the process of
applying to the CMA for the capital increase
through a rights issue.
On 27 May 2014, SCC management
announced that a fire had broken out in the
Fiberoptic Cables factory in Jeddah Industrial
City, Phase 4. Management explained that the
fire has not had any significant effect on the
Fiberoptic Cables factory and that nobody
was hurt or injured.
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Saudi Cable Co.

Valuation data
Year to
12/2010a
12/2011a
12/2012a
12/2013a

1,857
-61
-97
-158
-64
-77
-77
-4
-88
-88
Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
3,200
58
-74
-16
-72
1
1
0
5
5
2,688
-34
-86
-120
-110
-160
-160
-4
-156
-156
2,448
-102
-94
-196
-153
-209
-209
-29
-229
-229
-244
-165
-134
-57
450
-401
-271
-122
-121
-57
418
-355
515
-154
-146
0
-330
384
436
-62
-54
0
-389
398
101
857
2,366
124
3,643
473
1,817
1,693
1,184
3,518
132
874
2,786
93
4,107
712
2,236
2,142
1,009
4,014
144
920
2,369
132
3,774
807
1,906
1,773
915
3,642
154
826
1,748
122
3,212
906
1,517
1,395
674
3,090

Capex
Dividends
Change in net debt
FCF equity

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Year to
(SARm)
12/2010a
12/2011a
12/2012a
12/2013a
1.3
0.9
1.0
0.7
0.7
40.6
0.6
0.6
0.8
0.8
-43.2
6.0
0.9
-41.5
6.0
1.0
38.1
0.0
1.4
39.6
0.0
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price
Not Rated
(SAR) 12.44
Reuters (Equity)
Market cap (USDm)
Country
Analyst
Target price
2110.SE
252
Saudi Arabia
Not Rated
Bloomberg (Equity)
SCACO AB
Market cap (SARm)
945
Sector
Building Products
Contact
Not Rated
Price relative
30
30
25
25
20
20
15
15
10
10
0
2012
0
2013
Saudi Cables
2014
Rel to Tadawul
Source: HSBC

Year to
1
7
.
2
(SAR) Not Rated
12/2010a
12/2011a
12/2012a
12/2013a
-24.5
72.3
-16.0
-8.9
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
31.0
46.5
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
0.5
-2.5
-7.4
-2.4
-3.3
-8.5
-1.0
1.4
-27.6
-0.1
0.8
0.1
0.5
0.1
1.8
-0.5
0.8
2.1
37.2
-0.1
0.7
-4.3
-17.1
-4.1
-1.3
-4.5
-0.3
1.9
-52.1
0.3
0.8
-7.4
-34.0
-7.1
-4.2
-8.0
-0.7
2.1
-13.7
0.3
-1.16
-1.16
0.75
15.57
0.07
0.07
0.75
13.28
-2.06
-2.06
0.00
12.04
-3.01
-3.01
0.00
8.86

DPS
Book value
129
abc
Equities
Saudi Arabia
July 2014
Saudi Paper
Manufacturing Company
SPM AB, Price SAR42.7, Not Rated
Company description
Saudi Paper Manufacturing Company was
established in 1989. Its business activity is mainly
comprised of the manufacture of high quality
tissue paper and paper recycling.
In 1992, the first paper machine was installed to
produce 16,000 ton/year of jumbo tissue paper
rolls. In 1994, a de-inking plant was installed to
treat waste paper and turn it into raw material
suitable for tissue machine production. In 1995, a
second paper machine was installed to produce
24,000 ton/year. In 2001, a third 30,000 ton/year
paper machine was installed, bringing the total
production capacity of tissue paper to 70,000
ton/year. Saudi Recycling Co. was established in
2002 to collect all kinds of waste paper, partly for
in-house use in the de-inking plant and the rest is
sold to outside consumers. Saudi Converting Co.
was established in 2003 to produce several
consumer tissue paper products.
The company uses virgin pulp, blended-fibers,
and de-inked papers as raw materials.
Financials
Saudi Paper Manufacturing Company reported
3% growth in revenues during 2013. The group
gross margins were down 4.5pp while operating
margins were down 5.65pp on a y-o-y basis.
130
Recent news
On 21 Jul 2014, Saudi Paper Manufacturing
Company announced Q2 14 results. Net
income for the quarter was up by 29% mainly
due to one-off write down of non-usable raw
materials in the base period. Operating profit
for the period was down 12% due to drop in
gross margins and cut in selling prices of
converted tissue products.
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Saudi Paper Manufacturing Co.

Valuation data
Year to
12/2010a
12/2011a
12/2012a
12/2013a

804
185
-50
135
-12
125
125
0
123
123
Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
836
152
-40
112
-15
104
104
0
100
100
794
152
-50
102
-21
106
106
0
102
102
820
108
-49
59
-27
35
35
0
32
32
85
-110
-110
-38
62
-23
74
-118
-164
-45
167
-41
116
-62
-51
-53
44
54
140
-10
-9
-56
-162
133
13
855
614
36
1,507
72
821
785
595
1,471
28
952
715
67
1,732
69
989
922
651
1,665
25
946
839
123
1,848
89
1,033
909
701
1,725
23
907
830
70
1,765
129
930
860
677
1,694

Capex
Dividends
Change in net debt
FCF equity

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Year to
(SARm)
12/2010a
12/2011a
12/2012a
12/2013a
3.5
15.1
1.9
15.7
3.2
-1.3
2.0
3.3
18.3
1.7
19.1
3.0
-2.3
2.3
3.5
18.3
1.6
18.8
2.7
2.8
2.7
3.4
25.8
1.6
60.6
2.8
6.8
2.9
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price
Not Rated
(SAR) 42.67
Reuters (Equity)
Market cap (USDm)
Country
Analyst
Target price
2300.SE
512
Saudi Arabia
Not Rated
Bloomberg (Equity)
SPM AB
Market cap (SARm)
1,920
Sector
Building Products
Contact
Not Rated
Price relative
60
60
50
50
40
40
30
30
20
20
10
2012
10
2013
Saudi Paper
2014
Rel to Tadawul
Source: HSBC

Year to
1
7
.
2
(SAR) Not Rated
12/2010a
12/2011a
12/2012a
12/2013a
44.1
24.9
26.5
29.4
30.4
4.0
-17.8
-16.7
-17.3
-18.1
-5.0
0.2
-9.0
1.8
1.7
3.3
-29.2
-42.2
-66.7
-69.0
0.5
8.3
20.6
8.1
23.0
16.7
15.5
1.3
4.3
0.1
0.5
6.0
15.4
5.8
18.2
13.4
10.1
1.4
6.1
0.1
0.5
5.9
14.6
5.5
19.2
12.8
7.4
1.3
6.0
0.1
0.5
1.9
4.7
1.8
13.1
7.2
4.0
1.3
8.0
0.2
2.72
2.72
0.83
13.22
2.23
2.23
1.00
14.46
2.27
2.27
1.17
15.58
0.70
0.70
1.25
15.04
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
131
abc
Equities
Saudi Arabia
July 2014
United Wire Factories

Company
ASLAK AB, Price SAR49.9, Not
Rated
Company description
United Wire Factories (Aslak) was established in
2006 as a result of the mergers of three companies:
Saudi Wire Factory (est. 1982)
AlRiyadh Wire Company (est. 1989)
Gulf Wire Company (est. 1990)
The company manufactures and markets products
for the construction and building materials sector
through eight factories spread throughout the
Kingdom. Aslak supplies steel rebars, concrete
welded mesh, nails, chain link fence, barbed
wires, and cloth hangers.
The company went public in June 2011.
Financials
Aslak reported flat revenues in 2013 while gross
margins improved by 1.35pp on a y-o-y basis.
Operating margins of the group improved by
55bps y-o-y. The management pointed to strong
cost control for the better performance. During
2013, construction & building material sector
accounted for 81% of the revenues while civil
sector accounted to the rest.
132
Recent news
10 July 2014 Aslak management announced
Q2 14 results. Net income for the group
dropped by 11% y-o-y in Q2 14 implying
17.7% drop in H1 14. According to
management, a drop in sales and increases in
operating costs were the key causes of weaker
performance.
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: United Wire Factories Co.

Valuation data
Year to
12/2010a
12/2011a
12/2012a
12/2013a

571
139
-22
117
0
116
116
0
116
116
Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
855
121
-15
106
0
107
107
0
107
107
1,005
133
-19
115
0
115
115
0
115
115
1,001
138
-18
120
0
121
121
0
121
121

Capex
Dividends
Change in net debt
FCF equity

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Year to
121
-27
-24
-56
-2
94
80
-26
-25
-49
0
54
72
-17
-17
-73
0
55
123
-32
-31
-49
0
91
0
109
275
74
384
54
0
-74
329
311
0
119
299
79
418
37
0
-79
378
339
0
118
316
61
434
19
0
-61
411
373
0
131
386
104
517
41
0
-104
473
413
(SARm)
12/2010a
12/2011a
12/2012a
12/2013a
3.7
15.1
6.7
18.9
4.2
4.3
2.6
2.4
17.3
6.2
20.5
5.8
2.5
2.2
2.1
15.6
5.6
19.0
5.3
2.5
3.3
2.1
15.1
5.0
18.0
4.6
4.2
2.2
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price
Not Rated
(SAR) 49.90
Reuters (Equity)
Market cap (USDm)
Country
Analyst
Target price
1301.SE
584
Saudi Arabia
Not Rated
Bloomberg (Equity)
ASLAK AB
Market cap (SARm)
2,189
Sector
Building Products
Contact
Not Rated
Price relative
60
60
50
50
40
40
30
30
20
20
10
2012
10
2013
Aslak
2014
Rel to Tadawul
Source: HSBC

Year to
1
7
.
2
(SAR) Not Rated
12/2010a
12/2011a
12/2012a
12/2013a
36.9
23.1
25.6
24.6
24.6
49.9
-12.7
-9.3
-7.6
-7.6
17.6
10.4
8.4
7.9
7.9
-0.4
3.6
4.5
5.2
5.2
1.8
37.2
35.2
30.1
24.3
20.5
2.5
31.6
28.3
25.6
14.1
12.4
2.7
31.0
28.0
26.6
13.3
11.4
2.4
29.3
25.7
23.5
13.8
12.0
-0.2
-0.5
-1.6
-0.2
-0.7
-1.0
-0.1
-0.5
-1.2
-0.2
-0.8
-1.2
2.64
2.64
1.28
11.79
2.44
2.44
1.11
8.62
2.63
2.63
1.67
9.38
2.76
2.76
1.11
10.78
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
133
abc
Equities
Saudi Arabia
July 2014
134
Equities
Saudi Arabia
July 2014
abc
Consumers
135
abc
Equities
Saudi Arabia
July 2014
Consumers
We see strong growth for Saudi consumers in coming years from
an increasing number of jobs, while Saudis are borrowing

aggressively and companies are ramping up investment
2013 growth was always likely to be muted due to a high base
effect and little movement in salaries in 2012
However, Saudi consumers are now trading on par with peers;
hence, while the backdrop remains positive, we believe it is time
to be more selective
4,000
2,000
2009
Salary-Public
Growth-Public (rhs)
136
2011
2012
Salary-Private
Growth-Private (rhs)
15
10
CEEMEA
Source: Thomson Reuters Datastream
Saudi
Jan-14
6,000
20
Jul-13
8,000
Jan-13
10,000
Jul-12
60%
50%
40%
30%
20%
10%
0%
-10%
-20%
12,000
Jan-12
14,000
One-year forward PE MENA consumers on par with

CEEMEA consumers
25
Jul-11
Public and private sector monthly salaries in Saudi (SAR)
However, the lacklustre growth of 2013 has not

prevented multiple expansion in the Saudi
consumer sector when we look at one-year
forward PE multiples, the stocks in aggregate are
now trading at record high levels and are on par
Jan-11
In our note Saudi Consumers: More incomes not

more income, published on 14 August 2013, we
highlighted how salaries have evolved in Saudi
Arabia, with the biggest change occurring in 2011
and subsequent changes being relatively small
(although in the case of the private sector, there
were cuts).
Jul-10
Since the Arab Spring in 2011, the Saudi

government has embarked on a number of initiatives
to increase the income of the Kingdoms population
and increase the number of people employed.
Hence, for consumer stocks, while sales growth in

2012 was fuelled by these salary increases in 2011,
the sales growth for the consumer stocks for 2013
was always going to be more muted. This was
particularly the case for Q3 (which in any case is
seasonally a weak quarter) and many investors
worried it was due to Saudization initiatives.
Jan-10
2012 was a tough act to follow
Raj Sinha*
HSBC Bank Middle East Ltd.
+971 4 423 6932
raj.sinha@hsbc.com
abc
Equities
Saudi Arabia
July 2014
with CEEMEA consumer peers. And we can see

why this has occurred: the story of the Saudi
consumer is one of a young population finding
employment via various government-driven
initiatives. Further, the currency peg offers a
degree of comfort to investors who wish to avoid
the uncertainties in other emerging markets.
Discount to peers has closed,

what next?
The question is what to do next with the Saudi
consumer stocks. It is entirely possible for the
Saudi sector to move to a premium, again based
on the reasons mentioned above and because
further spending could be stimulated by the
reintroduction of the unemployment benefit,
affecting 12% of the workforce.
In our previous report we have discussed the
impact of the unemployment benefit being
removed; the impact is approximated SAR2.4bn
per month, however, this now looks to be
continued in one form or another. To begin with,
compulsory unemployment insurance is being
introduced by the government; here the employer
will contribute, whilst the individual is employed
and the insurance fund will pay up upon the
individual losing his/her job. Second, the Human
Resources Development fund has effectively
introduced training programmes for those who
cannot find employment, where the individual
Total salaried income by segment per month (SARbn)

40
35
30
25
20
15
10
5
2009
Public
2011
Private
2012
Unemployment benefit
will receive a stipend (although its not clear,

whether Saudis need to attend the programme to
simply receive the income).
Loan growth supports a more positive

take
Since December 2011 weve seen loan growth to
the consumer sector increase at quite some pace.
Whilst the latest data we have is until Q3 2013,
the read-across from the latest results from banks
is that there is no slowdown here. Given that the
loans have grown somewhat since the last peak,
one could raise concerns about an overburdened
consumer; however, the number of people
employed has grown significantly and so has the
average salary, and as the chart shows below,
there is still more room to borrow.
Saudi Arabia consumer loans strong growth for

consumer loans outside auto and credit cards
Saudi total consumer loans (SARm) versus consumer

loans per people employed to avg. salary
350
1,400
35
1,200
30
250
1,000
25
200
800
20
150
600
15
100
400
10
50
200
Jun-13
Dec-12
Jun-12
Dec-11
Credit cards
Jun-11
Jun-10
Others
Dec-10
Dec-09
Jun-09
Jun-08
Dec-07
Source: SAMA
Dec-08
Auto & equipment
300
0
2009
Loans
2010
2011
2012
2013
Loans per emplo yed to avg. salary (rhs)
Source: SAMA, HSBC estimates
137
abc
Equities
Saudi Arabia
July 2014
Abdullah Al Othaim
Markets
AOTHAIM AB, Price SAR108.50,
Neutral, TP SAR82
Company description
Abdullah Al Othaim Markets is the second largest
food retailer in Saudi Arabia. Established in 1980,
the company has a major presence in the Central
and Eastern regions of the Kingdom, rather than
in the countrys most populated area, the Western
region. During 2013, Central region contributed
74%, while Eastern region contributed 12% of
group revenues. The company operates 121 stores
across Saudi Arabia as of end-2013, including
supermarkets, hypermarkets, corner stores and
wholesale markets, with more than 200,000 sqm
of selling space.
Investment thesis
Al Othaim has been seeing strong revenue growth
over the last few quarters, as the strong store
openings made in 2013 are now starting to
contribute to the groups top line. We estimate the
strong growth to continue in the medium term with
increasing penetration of modern retail in the
country of which Al Othaim is among the biggest
beneficiaries. In 2012, the companys top-line
growth had slowed down as the new store openings
were quite limited. However, in 2013-14, the growth
has picked up following a spate of openings.
138
Apart from this, Al Othaim has also seen a strong

increase in rental income during 2013-14 on a
y-o-y basis. From discussions with shopkeepers in
the malls that OREIDC (Othaim Real Estate
Investment and Development Co) operates we
believe that rents are going up; however, this has
not been confirmed by the company.
Although we see strong growth prospects for Al
Othaim in the medium term, especially at the topline level, retail operating margins of the group
have failed to report any strong improvement
unlike its main competitor Panda. Furthermore, Al
Othaims share price is up by more than 80% over
the last 12-month period, which, in our view,
prices in the growth potential; hence, we are
Neutral on the stock.
Financials
Al Othaim reported more than 30% revenue
growth in Q2 2014, leading to more than 22%
revenue growth for the first half of the year.
Management has pointed to strong pre-buying for
Ramadan as the main reason for the strong
growth. The pre-buying period fell in Q2 during
2014 instead of Q3 which was the case in 2013.
However, as per our estimates, Ramadan buying
could lead to 8-10% incremental growth, which
still leaves c20% organic sales growth for the
group in Q2 2014, which implies it was among
the strongest quarter over the last three-year
period. In terms of operating margins for H1
2014, the group has seen only a 5bp improvement.
Raj Sinha*
+ 971 4423 6932
raj.sinha@hsbc.com
Equities
Saudi Arabia
July 2014
abc
Valuation
We value Al-Othaim using a DCF model. The
WACC of 11% is derived from a risk-free rate
based on the 12-month SAIBOR rate of 1.8%; we
obtained the cost of debt by adding 220bp to the
12-month SAIBOR, arriving at 4%. Our cost of
equity, based on a combination of relative index
returns, CDS spread and inflation differential, is
12.7%. We use a long-term debt-to-equity ratio of
30%:70% and a beta of 1, obtained from
Bloomberg. Our DCF generates a 12-month target
price of SAR82.
At the time we set our target price, it implied a
potential return within the Neutral band; therefore,
we rate the stock Neutral. Potential return equals
Risks
Stronger-than-expected improvement in
operating margins
Strong growth in rental revenues
Slower-than-expected switch to organised

retail in Saudi Arabia
Increased competition and the introduction of
discount stores by competitors, which could
attract Al Othaims target demographic of low
to middle income customers
139
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Abdullah Al Othaim Market

Valuation data
Year to
12/2013a
12/2014e
12/2015e
12/2016e

Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
4,580
263
-91
172
-8
197
197
-5
192
192
5,181
326
-111
216
-7
257
257
-7
250
250
5,687
369
-124
245
-3
292
292
-7
285
285
6,328
417
-139
279
-5
327
327
-8
319
319

Capex
Dividends
Change in net debt
FCF equity

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Year to
338
-213
-201
-135
-73
106
424
-207
-207
-250
-91
206
386
-227
-227
-427
55
146
488
-253
-253
-478
4
222
15
711
567
110
2,000
887
258
148
807
296
15
808
795
279
2,368
1,053
336
57
932
286
15
911
790
224
2,512
1,125
336
112
1,003
366
15
1,025
849
220
2,734
1,268
336
116
1,083
402
(SARm)
12/2013a
12/2014e
12/2015e
12/2016e
0.9
16.4
14.6
25.4
6.1
2.5
2.8
0.8
12.8
14.7
19.5
5.2
5.0
5.1
0.7
11.4
11.5
17.1
4.9
3.6
8.8
0.7
10.0
10.3
15.3
4.5
5.5
9.8
Target price
(SAR)82.00
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price
Neutral
(SAR)108.50
Reuters (Equity)
Market cap (USDm)
Free float (%)
Country
Analyst
4001.SE
1,302
49
Saudi Arabia
Raj Sinha
125
125
105
105
85
85
65
65
45
45
25
2012
2013
Abdullah AL Othaim Market
12/2013a
Source: HSBC
12/2014e
12/2015e
12/2016e
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
11.6
31.5
46.7
44.5
44.8
13.1
24.0
25.4
30.4
30.4
9.8
13.3
13.7
13.8
13.8
11.3
13.0
13.6
11.8
11.8
17.2
63.0
25.8
10.6
5.7
3.8
32.9
18.4
0.6
228.5
17.8
72.3
28.8
11.8
6.3
4.2
44.7
6.1
0.2
745.8
17.4
73.3
29.5
11.8
6.5
4.3
107.1
11.2
0.3
345.3
16.5
70.7
30.6
12.3
6.6
4.4
91.8
10.7
0.3
422.0
4.27
4.27
3.00
17.92
5.56
5.56
5.56
20.70
6.33
6.33
9.50
22.29
7.08
7.08
10.62
24.06
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
140
Bloomberg (Equity)
AOTHAIM AB
Market cap (SARm)
4,883
4,189
Sector
Food Products
Contact
+971 4 423 6932
Price relative

Year to
5
1
.
2
2014
25
2015
abc
Equities
Saudi Arabia
July 2014
Almarai
ALMARAI AB, Price SAR73, Neutral,
TP SAR67
Company description
Almarai is the worlds largest integrated dairy
company, measured by the size of its herds. Dairy
products provide the largest part of its sales
turnover; it also sells poultry, bakery products and
fruit juices across all six GCC countries and
Egypt. As of 2013, c65% of Almarais sales came
from Saudi Arabia. We believe Almarai has core
strengths that are hard to replicate: a vast number
of livestock, an expansive distribution network
and a milk yield per cow above the developed
market average. Almarai is also the flagship brand
of the company, a widely known and reputable
name in the GCC region.
Investment thesis
Amongst the Saudi consumer stocks, Almarai is
the best understood, in our view. The investment
thesis is predicated on the dairy division as dairy
consumption per capita increases from its current
below-developed market levels and on the
companys ability to enter new product categories
and rapidly gain market share.
In the long term, we believe the poultry division
offers the most potential for the company; however,
for 2013, the poultry division reported a net loss of
SAR339m, while the other divisions of the company
reported strong improvements in terms of margins.
On 4 February 2014, Almarai announced the
completion of a third production line for its poultry
division. Following the completion of this
production line, the division can reach a capacity of
200m birds per annum (compared to 64m birds sold

in 2013e) in the medium term. According to
management, the poultry division should be able to
achieve breakeven once it starts to produce 110m
birds per annum. However, the current mortality rate
among the birds, which management states is at high
double digits, means the division will likely continue
to lose money for at least the next year. According to
management, the division will need to bring down
the mortality rate to 6-10% to achieve profitability.
Whilst we believe the company is on course to
achieve the 110m birds per annum break-even level
in Q4 2014e, the mortality level is still an issue. The
poultry division currently accounts for only c7% of
sales; however, as a result of the significant
investment in the division, we estimate it will
contribute 14% of total sales by 2016e, with
potential risk to the upside.
Raj Sinha*
+971 4423 6932
raj.sinha@hsbc.com
Financials
Almarai reported 14% revenue growth for Q2
2014, with all divisions contributing to the
growth. The groups operating margins dropped
by 1.4ppt during the quarter as the poultry
division continues to be loss-making.
Management has pointed to a 17% increase in
staff strength, mainly due to the growing poultry
division, for the faster growth of expenses.
141
abc
Equities
Saudi Arabia
July 2014
Valuation
Risks
We value Almarai using a DCF. The WACC of

9.3% is derived from a risk-free rate based on the
12-month SAIBOR rate of 1.8%; we obtain the
cost of debt by adding 220bp to the 12-month
SAIBOR, arriving at 4%. Our market cost of
Bloomberg. We assume a long-term growth rate
of 2.5%. Our DCF generates a 12-month target
price of SAR67.

return within the Neutral band; therefore, we rate the
stock Neutral. Potential return equals the percentage
when indicated.
142
Almarai is able to realise a significant

premium when it comes to pricing within its
poultry business; we currently assume prices
in line with the market
The company imports 60% of its animal feed

and all of its ingredients for cheese, butter and
fruit juice, mainly from Europe; therefore,
changes in the EUR/SAR exchange rate affect
profit margins
There is currently no insurance on the
companys livestock. Although its six large
dairy farms are spread across the country, an
epidemic in one farm could materially affect
the companys performance
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Almarai
Neutral
Valuation data
Year to
12/2013a
12/2014e
12/2015e
12/2016e

Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
11,219
3,127
-1,331
1,796
-254
1,542
1,542
-42
1,502
1,502
13,094
3,575
-1,503
2,072
-273
1,799
1,799
-48
1,753
1,753
15,145
4,295
-1,544
2,751
-253
2,498
2,498
-64
2,436
2,436
17,020
4,894
-1,561
3,333
-178
3,155
3,155
-78
3,079
3,079

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
2,586
-2,799
-3,302
-600
-76
-572
3,910
-3,072
-3,072
-876
382
605
3,845
-2,859
-2,859
-1,218
553
752
4,681
-2,848
-2,848
-1,540
90
1,600
1,310
16,984
6,296
1,829
26,062
3,545
10,372
8,543
11,019
19,217
1,310
18,728
6,403
1,276
27,913
4,180
10,372
9,096
12,237
20,986
1,310
20,487
6,938
1,186
30,207
4,937
10,372
9,186
13,776
22,613
(SARm)
12/2013a
12/2014e
12/2015e
12/2016e
4.6
16.7
2.9
29.2
4.3
-1.3
1.4
4.0
14.5
2.7
25.0
4.0
1.4
2.0
3.5
12.2
2.5
18.0
3.6
1.7
2.8
3.1
10.7
2.3
14.2
3.2
3.7
3.5
Target price
(SAR)67.00
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price

Capex
Dividends
Change in net debt
FCF equity
Year to
(SAR)73.00
Reuters (Equity)
Market cap (USDm)
Free float (%)
Country
Analyst
2280.SE
11,678
54
Saudi Arabia
Raj Sinha

12/2013a
79
74
69
64
59
54
49
44
39
34
29
2012
2013
2014
79
74
69
64
59
54
49
44
39
34
29
2015
Source: HSBC
12/2014e
12/2015e
12/2016e
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
Bloomberg (Equity)
ALMARAI AB
Market cap (SARm)
43,800
51,864
Sector
Food Products
Contact
+971 4 423 6932
Price relative
1,310
15,028
5,471
1,811
23,280
2,037
9,972
8,161
10,142
17,961
Almarai
Year to
8
.
2
13.5
32.7
7.4
3.4
4.2
16.7
14.4
15.4
16.7
16.7
15.7
20.1
32.7
38.8
39.0
12.4
13.9
21.2
26.3
26.4
0.7
10.4
17.0
8.2
27.9
16.0
12.3
75.8
2.6
31.7
0.7
10.8
16.6
8.2
27.3
15.8
13.1
73.4
2.4
45.8
0.8
13.3
20.9
9.9
28.4
18.2
17.0
70.8
2.1
42.3
0.8
14.9
23.7
11.2
28.8
19.6
27.5
63.8
1.9
51.0
2.50
2.50
1.00
16.90
2.92
2.92
1.46
18.36
4.06
4.06
2.03
20.39
5.13
5.13
2.57
22.96
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
143
abc
Equities
Saudi Arabia
July 2014

ALHOKAIR AB, Price SAR107.50,
Company description
Fawaz Abdulaziz Alhokair (Alhokair) is the
leading branded apparel retailer in Saudi Arabia.
The company currently has more than 40%
market share in the apparel retail sector.
Established in 1990, the company currently
operates 1,600 stores, including 1,217 in Saudi
Arabia, with a total retail space of more than
350,000 sqm. Apart from Saudi Arabia, Alhokair
has a presence in North Africa and Central Asia,
as well as North America.
Investment thesis
Over the last few quarters Alhokair has made a
host of acquisitions that have helped it grow at a
strong pace, both in Saudi and international
markets. Alhokair continued to report strong topline growth, with Q2 2014 seeing more than a
30% increase in revenues on a y-o-y basis.
For 2014e, we see a boost in Alhokairs growth,
mainly from its new acquisition of the Spanish
company Blanco. We believe that the companys
accelerated expansion plan in international markets
that has seen the proportion of selling space outside
Saudi increase to 30% by end-2013 from 10% in
March 2011 bodes well for its future growth.
Rental costs represent more than 10% of
Alhokairs sales, and we believe the increasing
rental rates in Saudi could start to put pressure on
the companys margins going forward. According
to JLL estimates, retail rental rates in Riyadh and
Jeddah have increased by c8% over the last year.
144
Also the stock is currently trading at a significant

premium to Saudi consumer peers in terms of
one-year forward PE multiples, which already
prices in the strong growth potential, in our view.
Financials
Alhokair reported 32% revenue growth in the
June ending first quarter, well above our estimate
of 14%. We believe that this was partly due to the
earlier-than-expected realisation of a contribution
from the Blanco acquisition and due to strong
sales from the start of Ramadan. We believe that
coming quarters will also see strong growth,
especially from the integration of Blanco as well
as organic growth in Saudi. Although the groups
revenue growth was strong in the June ending
quarter, gross margin and operating margin
dropped by 50bp and 90bp, respectively. We
believe that this is partly due to the low-margin
Blanco business. We estimate Blancos margins to
improve in coming years, which should support a
strong improvement in group margins.
Valuation
We value Alhokair using a DCF model. The
WACC of 10.1% is derived from a risk-free rate
based on the 12-month SAIBOR rate of 1.8%; we
obtained the cost of debt by adding 220bp to the
12-month SAIBOR, arriving at 4%. Our cost of
Bloomberg. We assume a long-term growth rate
of 3%. Our DCF generates a 12-month target
price of SAR90.5.
Raj Sinha*
+971 4423 6932
raj.sinha@hsbc.com
Equities
Saudi Arabia
July 2014
abc

the time we set our target price, it implied a
potential return within the Neutral band; therefore,
Risks
Stronger-than-expected improvement in
margins, especially in international operations
The Inditex group (which includes the Zara

brand) accounts for almost one-quarter of the
companys sales; therefore, any further
attempts by Inditex to move away from
Alhokair could have an adverse impact
Rental inflation continues at a high level and
higher-than-expected growth in this area
could result in pressure on margins
145
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Fawaz Abdulaziz Alhokair

Valuation data
Year to
03/2013a
03/2014e
03/2015e
03/2016e

Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
4,659
758
-174
584
-34
648
648
-31
618
618
5,748
1,034
-216
819
-49
830
830
-41
788
788
7,376
1,364
-255
1,109
-56
1,065
1,065
-85
980
980
8,213
1,544
-268
1,276
-62
1,226
1,226
-98
1,128
1,128

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Year to
346
-494
-1,232
-420
783
-242
686
-460
-700
-788
154
226
837
-553
-565
-980
122
284
1,186
-575
-587
-1,128
-109
611
0
2,412
1,956
147
4,667
972
1,259
1,112
2,416
3,249
0
2,722
2,219
25
5,253
1,067
1,259
1,234
2,906
3,849
0
3,040
2,527
134
5,890
1,141
1,259
1,125
3,470
4,292
(SARm)
03/2013a
03/2014e
03/2015e
03/2016e
5.0
30.7
8.4
36.5
11.2
-1.1
1.9
4.1
22.6
7.2
28.6
9.3
1.0
3.5
3.2
17.2
6.1
23.0
7.8
1.3
4.3
2.8
15.1
5.4
20.0
6.5
2.7
5.0
Target price
(SAR)90.50
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price

Capex
Dividends
Change in net debt
FCF equity
Neutral
(SAR)107.50
Reuters (Equity)
Market cap (USDm)
Free float (%)
Country
Analyst
4240.SE
6,019
30
Saudi Arabia
Raj Sinha
127
127
107
107
87
87
67
67
47
47
27
27
7
2012
2013
03/2013a
Source: HSBC
03/2014e
03/2015e
03/2016e
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
45.5
40.5
37.2
40.0
45.2
23.4
36.5
40.2
28.1
27.5
28.3
31.9
35.5
28.3
24.2
11.4
13.2
15.1
15.1
15.1
2.3
27.0
36.1
18.6
16.3
12.5
22.6
46.9
1.3
36.1
1.9
25.9
35.5
18.0
18.0
14.2
21.2
45.6
1.1
61.7
2.1
28.7
36.8
19.7
18.5
15.0
24.2
42.2
0.9
67.8
2.0
28.8
35.4
20.2
18.8
15.5
24.7
32.2
0.7
105.4
2.94
2.94
2.00
9.63
3.75
3.75
3.75
11.51
4.66
4.66
4.66
13.84
5.37
5.37
5.37
16.52
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
146
Bloomberg (Equity)
ALHOKAIR AB
Market cap (SARm)
22,575
23,387
Sector
Multiline Retail
Contact
+971 4 423 6932
Price relative
0
1,928
1,903
352
4,070
717
1,310
958
2,022
2,762

Year to
6
8
.
4
2014
7
2015
abc
Equities
Saudi Arabia
July 2014
Jarir Marketing Co.

JARIR AB, Price SAR200,
Overweight, TP SAR237
Company description
Established in 1979, primarily as a bookstore,
Jarir Marketing Co. has since branched into the
retailing of computers, electronics goods, and
office and school supplies, as well as other small
gift items. The company also undertakes the
translation of bestselling books into Arabic. As of
end-H1 2014, the company operated 35
showrooms. Apart from Saudi Arabia, Jarir has
outlets in Qatar, the UAE and Kuwait, and has
real estate investments in Egypt.
Investment thesis
Jarir was among the few Saudi Arabian consumer
companies to record top-line growth in 2013.We
believe the fact that Jarirs 13% top-line growth
came without a single new store opening implies
strong growth potential once the new store
openings resume in 2014. Management has
guided that the company will open seven new
stores in 2014 (three stores already opened in H1
2014). Although H1 2014 sales growth has been
pretty muted and came in at 4%, we believe that
in the second half we will see a strong pick-up, as
the newly opened stores start contributing to the
top line.
Furthermore, we believe that mere top-line growth
does not tell the whole story, as the groups net
income for H1 2014 was up by 10%. In H1 2014,
the company reported that the lower sales growth
was due to a decline in the sales of computers and
tablet PCs, with low growth in smartphones that
has been compensated for by growth in other

categories of more than 20% y-o-y. With
increasing sales in more profitable divisions, we
believe that Jarir should see improving margins in
coming quarters, a trend we have seen in first half
of the year.
Raj Sinha*
+971 4423 6932
raj.sinha@hsbc.com
Financials
Jarir reported a slowdown in revenue growth,
which came in at 2.5% in Q2 2014. However, the
groups operating margin improved by 20bp and
the gross margin improved by 50bp during the
quarter. For H1 2014, Jarir reported 4% revenue
growth, but again reported 80bp gross margin
expansion and 50bp operating margin expansion.
Management has pointed to a changing product
mix for the improving margins of the group. We
expect revenue growth to pick up in coming
quarters as newly opened stores start contributing
to the group top line, while margin expansion
should continue due to a changing product mix.
Valuation
We value Jarir using a DCF. The WACC of 9.3% is
derived from a risk-free rate based on the 12-month
SAIBOR rate of 1.8%; we obtain the cost of debt by
adding 220bp to the 12-month SAIBOR, arriving at
4%. Our market cost of equity, based on a
combination of relative index returns, CDS spread
and inflation differential, is 12.7%. We use a longterm debt-to-equity ratio of 30%:70% and a beta of
0.9, obtained from Bloomberg. We assume a longterm growth rate of 2.5%. This yields a 12-month
target price of SAR237.
147
Equities
Saudi Arabia
July 2014

of 9%. Our target price implies a potential return
of 19%, above the Neutral band; therefore, we
rate the stock Overweight. Potential return equals
Risks
Higher number of store openings than

expected
Stronger-than-expected revenues from
e-book sales
The companys expansion plans, which could

lead to a cannibalisation of existing sales
The strong top-line growth currently being
seen is mainly on the back of smart phone
sales. If consumers start preferring cheaper
versions of smartphones in the Saudi market,
this could negatively affect Jarirs growth
148
abc
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Jarir Marketing Co

Valuation data
Year to
12/2013a
12/2014e
12/2015e
12/2016e

Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
5,242
669
-21
648
-7
673
673
-21
652
652
5,942
780
-27
753
-5
780
780
-25
755
755
6,887
912
-33
879
1
913
913
-29
884
884
7,665
1,041
-39
1,002
13
1,047
1,047
-33
1,014
1,014

Capex
Dividends
Change in net debt
FCF equity

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Year to
587
-218
-143
-720
58
338
826
-91
-91
-614
-213
611
1,030
-27
-27
-795
-389
790
1,123
-33
-33
-912
-295
941
0
999
1,173
86
2,200
778
250
164
1,172
1,308
0
1,063
1,503
299
2,593
938
250
-49
1,405
1,328
0
1,057
2,052
688
3,138
1,213
250
-438
1,675
1,208
0
1,051
2,470
983
3,548
1,406
250
-733
1,893
1,132
(SARm)
12/2013a
12/2014e
12/2015e
12/2016e
3.5
27.2
13.9
27.6
15.4
1.9
4.0
3.0
23.0
13.5
23.8
12.8
3.4
3.4
2.6
19.3
14.5
20.4
10.7
4.4
4.4
2.3
16.6
15.3
17.8
9.5
5.2
5.1
Target price
(SAR)237.00
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price
Overweight
(SAR)200.00
Reuters (Equity)
Market cap (USDm)
Free float (%)
Country
Analyst
4190.SE
4,799
43
Saudi Arabia
Raj Sinha
226
226
206
206
186
186
166
166
146
146
126
126
106
106
86
86
66
2012
2013
Jarir Marketing Co
12/2013a
2014
66
2015
Source: HSBC
12/2014e
12/2015e
12/2016e
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
Bloomberg (Equity)
JARIR AB
Market cap (SARm)
18,000
17,951
Sector
Multiline Retail
Contact
+971 4 423 6932
Price relative

Year to
1
8
.
5
13.1
14.6
15.3
14.4
-23.7
13.4
16.6
16.2
15.9
15.8
15.9
16.9
16.8
17.0
17.0
11.3
14.2
13.9
14.7
14.7
4.3
52.0
59.3
31.2
12.8
12.4
95.6
14.0
0.2
357.9
4.5
55.3
58.6
31.5
13.1
12.7
158.7
-3.5
-0.1
5.4
67.1
57.4
30.8
13.2
12.8
6.6
82.9
56.8
30.3
13.6
13.1
-26.2
-0.5
-38.7
-0.7
7.24
7.24
8.00
13.02
8.39
8.39
6.82
15.61
9.82
9.82
8.84
18.61
11.26
11.26
10.14
21.03
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
149
abc
Equities
Saudi Arabia
July 2014
Herfy Food Services

HERFY AB, Price SAR104.50,
Company description
Herfy is one of the largest players in the Saudi
fast food sector with interests in rusk production
and meat processing, as well as bakeries. The
company also has franchised fast food outlets in
Bahrain, Kuwait and the UAE, but this is a small
component for the moment. The fast food
operations contribute c85% of the companys
revenue as of 2013. As of H1 2014, Herfy
operated 220 fast food outlets, one of the largest
such groups in the Kingdom. The company has
been opening 10-20 stores per year over the last
five years.
Investment thesis
We see the following positive factors that should
help Herfy in the long term:
Market growth: Herfy should gain from the
strong growth in the Saudi fast food sector as
the mainly young population is more likely to
consume fast food.
Presence in markets outside major cities:
Our analysis shows that Herfy is one of the few
operators with a strong presence in markets
outside major cities in Saudi. We believe that
should help it to grow at a faster rate.
Store coverage and expansion: We believe
Herfy has one of the largest coverage in Saudi in
terms of outlets, which demonstrates its ability
to execute a large number of store openings.
150
Vertical integration: Herfys meat

processing plant gives it an added advantage,
which should help it achieve better control of
its input costs in fast food outlets.
However, even after opening 30 new outlets over
the last six quarters, the groups sales growth has
remained at low single digits. Furthermore, the
stock is up by more than 30% year to date and
trades at a premium to Saudi peers in terms of
one-year forward PE multiples, which, in our
view, prices in the long-term potential. Hence, we
are Neutral on Herfy.
Financials
Herfy reported revenue growth of 1.8% in Q2
2014, implying mere 2.6% growth in H1 2014.
This follows 13 new outlet openings for the year,
implying c7% growth in the number of outlets.
Although the groups revenue growth has been
weak, operating margins have seen robust
improvements so far in 2014. In H1 2014, the
operating margin improved by 60bp. We estimate
the operating margin for the group to see further
improvements in coming quarters as the level of
the groups backward integration increases.
Valuation
Our DCF-based valuation for Herfy points to a
12-month target price of SAR107.86, using a
WACC of 10.1%, an ERP of 12.7%, a RFR of
1.8% and a beta of 0.9.
Raj Sinha*
+971 4423 6932
raj.sinha@hsbc.com
Equities
Saudi Arabia
July 2014
abc

when indicated.
Risks
Delays in new outlet openings from expected

levels could lead to slower-than-expected
growth
Around 50% of Herfys outlets are currently
in Riyadh. Further new openings in the city
could lead to cannibalisation, which in turn
could decrease the outlets yields
Herfys fast food divisions like-for-like
growth potential could be negatively affected
by weak Saudi consumer confidence,
especially since the company deals with
discretionary items that are usually the first to
be cut from consumers purchasing list in
case of weakness
Higher raw material prices, which could
negatively affect the companys margins and
its valuation
Strong improvement in like-for-like growth

Accelerated growth in the number of outlets
151
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Herfy Food Services

Valuation data
Year to
12/2013a
12/2014e
12/2015e
12/2016e

Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
849
237
-50
187
-2
196
196
-5
191
191
937
268
-57
211
-2
213
213
-5
208
208
1,051
302
-63
238
-2
241
241
-6
235
235
1,185
344
-72
272
-1
276
276
-7
269
269

Capex
Dividends
Change in net debt
FCF equity

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Year to
205
-130
-111
-112
8
63
266
-120
-120
-125
-12
142
281
-150
-150
-141
10
127
331
-160
-160
-161
-10
167
0
568
223
57
790
126
63
6
601
607
0
631
218
44
848
126
38
-6
684
678
0
717
212
13
930
135
17
4
778
781
0
805
236
14
1,041
148
8
-6
885
879
(SARm)
12/2013a
12/2014e
12/2015e
12/2016e
5.7
20.4
8.0
25.2
8.0
1.3
2.3
5.1
18.0
7.1
23.2
7.1
2.9
2.6
4.6
16.0
6.2
20.6
6.2
2.6
2.9
4.1
14.0
5.5
18.0
5.5
3.5
3.3
Target price
(SAR)107.86
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price
Neutral
(SAR)104.50
Reuters (Equity)
Market cap (USDm)
Country
Analyst
6002.SE
1,287
Saudi Arabia
Raj Sinha
Year to
109
109
99
99
89
89
79
79
69
69
59
59
49
49
39
2012
2013
Source: HSBC
12/2013a
12/2014e
12/2015e
12/2016e
0.8
4.4
3.3
5.8
5.9
10.4
13.3
13.2
8.7
8.7
12.1
12.5
12.8
12.8
12.8
12.8
14.2
14.2
14.4
14.4
1.5
32.3
34.1
25.6
27.9
22.0
157.2
1.0
0.0
3399.0
1.5
32.1
32.4
25.4
28.6
22.5
147.4
-0.9
0.0
1.4
31.8
32.1
26.4
28.7
22.7
198.0
0.5
0.0
7108.9
1.4
32.0
32.3
27.3
29.1
23.0
413.5
-0.7
0.0
4.14
4.14
3.34
13.01
4.50
4.50
3.78
14.81
5.08
5.08
4.27
16.84
5.81
5.81
4.88
19.16
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
152
Bloomberg (Equity)
HERFY AB
Market cap (SARm)
4,828
Sector
Hotels Restaurants & Leisure
Contact
+971 4 423 6932
Price relative
Herfy Food Services
4
4
.
5
2014
39
2015
abc
Equities
Saudi Arabia
July 2014
Savola
SAVOLA AB, Price SAR79.25,
Neutral, TP SAR74
Company description
Savola is one of the largest business
conglomerates in Saudi Arabia, with operations
spanning food production, retail, plastic
packaging and real estate, in addition to a host of
other strategic investments in various industries
across MENA and Central Asia.
The company has three core operations: edible
oils, sugar and retail. As of 2013, the foods
division accounted for more than 55% of the
companys revenues, while the retail arm (Panda)
contributed 41%. Panda operates 110
supermarkets, 52 hypermarkets and 23
convenience stores, with selling space of 547,000
sqm across Saudi Arabia, the UAE and Lebanon
as of end-2013.
Investment thesis
In 2013, Savolas top-line growth has been slow,
mainly on the back of weak Egyptian operations and
a significant drop in revenue from the sugar division.
However, in terms of margins, the company has
been reporting strong improvement throughout the
year. We see strong growth potential for Savola in
the medium term. Our analysis on food retail formats
in the region clearly shows that hypermarkets are the
best format to be in Saudi and Savola with its strong
presence in the format should benefit from this.
Savola launched its new food retail format My
Panda, a small convenience store format, last year.
As of Q1 2014, the company has already opened
more than 50 such stores. We believe that Savolas
retail expansion will pick up pace as this new format
requires less space selling space (200 sqm versus

2,000 sqm and 7,000 sqm for Pandas supermarkets
and hypermarkets, respectively), which means real
estate acquisition/leasing will be easier. We expect
Panda to see a selling space CAGR of 11% over
next five years compared to 8% over the last four
years. We also see a strong structural growth
potential for the companys edible oil division,
considering the current level of consumption in the
region, as well as the companys focus on business
segments that are growing.
Raj Sinha*
+971 4423 6932
raj.sinha@hsbc.com
However, looking at the historical levels of the

implied forward PE for Savolas consolidated
operations we can see the current multiple is at a
c40% premium to the historical average. Given
this, and the 50% run-up during the last 12-month
period, we believe the stock is close to fairly
valued. Although we acknowledge the strong
growth potential and believe the medium-term
outlook for the company is healthy (especially
considering the strong margin improvement), we
would need to see even higher growth before
becoming more positive.
Financials
Savola reported a strong improvement in sales
growth for Q2 2014, with revenue increasing by
13% in a y-o-y basis. The main reason for such a
strong growth was 25% revenue growth in the
retail division partly due to the shift in Ramadan.
The groups net profit growth was even stronger
at 32% due to lower finance charges and lower
minority interest outlay.
153
abc
Equities
Saudi Arabia
July 2014
Valuation
Risks
We use a DCF methodology to value Savolas

core subsidiaries, with a WACC of 10.5%, which
is derived from a risk-free rate based on the 12month SAIBOR rate of 1.8% to obtain the cost of
debt we add 220bp to the 12-month SAIBOR,
arriving at 4%. Our market cost of equity, based
on a combination of relative index returns, CDS
spread and inflation differential, is 12.7%. We use
a long-term debt-to equity ratio of 30%:70% and a
beta of 1, which is the average for the
international peer group; we assume a long-term
growth rate of 2.5%. To this we add the
associates, which we value using market
capitalisation where listed or book value where
unlisted. Based on this, we arrive at a target price
of SAR74 for Savola.

when indicated.
154
Stronger-than-expected top-line growth,

especially for the Egyptian operations
Strong pick-up in margins at the sugar
division
Any change in sanctions against Iran, which

for the moment do not include staple foods
In case real estate developers started to reduce
the number of malls being built, Savola would
need to start building more stand-alone
supermarkets, which might not attract
significant footfall
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Savola
Neutral
Valuation data
Year to
12/2013a
12/2014e
12/2015e
12/2016e

Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
26,365
3,226
-649
2,577
-254
2,455
2,455
-311
1,704
1,704
27,921
3,592
-720
2,872
-342
2,530
2,530
-278
1,861
1,861
29,947
4,095
-733
3,362
-353
3,009
3,009
-331
2,264
2,264
31,545
4,369
-718
3,651
-363
3,288
3,288
-362
2,491
2,491

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
642
-1,039
342
-1,068
-82
481
2,485
-838
-242
-1,117
-690
2,299
2,338
-599
146
-1,585
-546
2,627
2,541
-631
254
-1,744
-689
3,022
1,324
6,503
10,940
3,011
27,149
5,303
9,395
6,383
10,493
10,452
1,324
6,368
12,234
3,822
28,805
5,602
9,659
5,837
11,173
10,503
1,324
6,281
13,479
4,752
30,552
5,925
9,901
5,149
11,920
10,407
(SARm)
12/2013a
12/2014e
12/2015e
12/2016e
1.6
12.8
4.0
24.8
4.3
1.4
2.5
1.4
11.2
3.9
22.7
4.0
6.8
2.6
1.3
9.6
3.7
18.7
3.8
7.9
3.7
1.2
8.7
3.7
17.0
3.6
9.2
4.1
Target price
(SAR)74.00
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price

Capex
Dividends
Change in net debt
FCF equity
Year to
(SAR)79.25
Reuters (Equity)
Market cap (USDm)
Free float (%)
Country
Analyst
2050.SE
11,283
60
Saudi Arabia
Raj Sinha
81
81
71
71
61
61
51
51
41
41
31
31
21
2012
2013
Savola
12/2013a
2014
21
2015
Source: HSBC
12/2014e
12/2015e
12/2016e
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
Bloomberg (Equity)
SAVOLA AB
Market cap (SARm)
42,318
40,319
Sector
Food Products
Contact
+971 4 423 6932
Price relative
1,324
6,385
9,046
1,322
24,741
5,030
8,395
7,073
9,749
10,403

Year to
6
.
6
-3.7
7.6
5.1
18.6
21.6
5.9
11.3
11.4
3.1
9.2
7.3
14.0
17.1
18.9
21.7
5.3
6.7
8.6
9.3
10.0
2.6
22.3
18.9
9.7
12.2
9.8
12.7
64.5
2.2
9.1
2.7
24.5
18.4
9.9
12.9
10.3
10.5
52.8
1.8
38.9
2.9
28.6
20.9
10.7
13.7
11.2
11.6
44.2
1.4
40.1
3.0
31.1
21.6
10.9
13.8
11.6
12.0
35.8
1.2
49.4
3.19
3.19
2.00
18.26
3.49
3.49
2.09
19.65
4.24
4.24
2.97
20.92
4.66
4.66
3.27
22.32
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
155
abc
Equities
Saudi Arabia
July 2014

CATERING AB, Price SAR193.75,
OW, TP SAR186
Company description
Saudi Airlines Catering (SACC) provides
complete catering services for Saudi Arabian
Airlines (Saudia) along with partial services for
various other major airlines. SACC also has
divisions that are involved in retailing within
airlines (Skysales), provides lounge services at
airports, and on the ground catering services to
both companies and religious travellers.
Investment thesis
Currently, the in-flight catering business generates
c76% of the companys sales with Skysales the
next major contributor at c10%. It should also be
noted that c70% of SACCs revenues are from
Saudia, which has c90% of the Saudi domestic
airline market in terms of passengers carried. As
the main caterer for Saudia, our positive
investment thesis for SACC is based on the
following factors:
Strong growth in air passenger traffic in
the MENA region: Over the last two years
the MENA region has seen the highest growth
in airline passenger traffic globally and
airlines continue to expect further growth as
load factors remain below the DM average.
Strong fleet expansion plans for Saudia:
Saudia plans to increase its fleet size to 164
airplanes by 2015 from 106 in 2012. This
implies a CAGR for the number of planes of
16% between 2012 and 2015, but seats
growth should be above a c19% CAGR
156
between 2012 and 2015 as the planes added

will have more capacity.
More long-haul flights at Saudia: Saudia is
currently planning to increase its long-haul
flights. Aside from the new flights, SACC
should also benefit from the increase in meals
per flight.
Saudi Arabian Airlines (Saudia) has a
35.7% stake in SACC: Currently, more than
two-thirds of SACCs revenue is from Saudia.
We believe the 35.7% Saudia owns in SACC
implies a constant revenue stream and from
Saudias perspective the income that it earns
from associates effectively acts as a rebate
against its own costs.
Growing number of Hajj visitors: SACC
also provides catering services to Hajj visitors
and strong growth in this area in the long term
could positively impact the top line.
Airport expansion plans at Saudi: This may
help the lounge business segment of SACC.
Financials
During Q2 2014, SACC reported strong revenue
growth of 16% with its in-flight catering division
reporting 14% growth and its business lounge
division reporting more than 30% growth. We
believe the group will continue to see such strong
growth rates in coming quarters. However, in
terms of margins, the group saw a significant
drop; operating margin in Q2 2014 dropped by
c4pp, mainly due to increases in general and
administrative costs.
Raj Sinha*
+971 4423 6932
raj.sinha@hsbc.com
Equities
Saudi Arabia
July 2014
abc
Valuation
Our DCF-based valuation for SACC produces a
12-month target price of SAR186 using a WACC
of 10.1%, an ERP of 12.7%, a RFR of 1.8% and a
beta of 0.9.
return above the Neutral band; therefore, we rate the
stock Overweight. Potential return equals the
Risks
c70% of the companys revenue is from

Saudia, which represents a high concentration
risk both in terms of the airline as well as its
significant exposure to Saudi Arabia
A considerable proportion of our long-term
growth forecast is dependent on Saudias fleet
expansion. If the fleet expansion is below
estimates, it could lead to lower revenues
for SACC
Since air travel is a discretionary expenditure,
a drop in consumer confidence could
negatively affect the top-line forecast
for SACC
157
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Saudi Airlines Catering

Valuation data
Year to
12/2013a
12/2014e
12/2015e
12/2016e

Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
1,867
561
-15
546
0
569
569
-46
523
523
2,123
644
-18
627
0
637
637
-57
579
579
2,608
799
-22
777
0
787
787
-71
717
717
2,911
894
-24
870
0
880
880
-79
801
801

Capex
Dividends
Change in net debt
FCF equity

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Year to
500
-24
-24
-451
129
408
656
-32
-32
-509
-115
557
701
-39
-39
-630
-32
581
869
-44
-44
-704
-121
736
0
238
1,451
893
1,689
527
0
-893
1,159
268
0
252
1,595
1,008
1,848
559
0
-1,008
1,286
281
0
270
1,768
1,040
2,038
591
0
-1,040
1,443
406
0
289
1,953
1,161
2,243
620
0
-1,161
1,619
461
(SARm)
12/2013a
12/2014e
12/2015e
12/2016e
8.0
26.7
55.9
30.4
13.7
2.6
2.8
7.0
23.1
53.0
27.4
12.4
3.5
3.2
5.7
18.6
36.5
22.2
11.0
3.7
4.0
5.1
16.5
31.9
19.8
9.8
4.6
4.4
Target price
(SAR)186.00
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price
Overweight
(SAR)193.75
Reuters (Equity)
Market cap (USDm)
Free float (%)
Country
Analyst
6004.SE
4,236
30
Saudi Arabia
Raj Sinha
203
203
183
183
163
163
143
143
123
123
103
103
83
83
63
63
43
2012
2013
12/2013a
Source: HSBC
12/2014e
12/2015e
12/2016e
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
10.7
7.4
7.7
16.9
18.4
13.7
14.8
14.8
11.8
10.8
22.8
24.0
24.0
23.7
23.7
11.6
11.9
11.9
11.7
11.7
12.1
325.0
47.1
32.2
30.1
29.2
7.7
207.8
47.4
32.8
30.4
29.5
7.6
205.9
52.5
36.9
30.6
29.8
6.7
182.4
52.3
37.4
30.7
29.9
-77.1
-1.6
-78.4
-1.6
-72.0
-1.3
-71.7
-1.3
6.38
6.38
5.50
14.13
7.07
7.07
6.21
15.68
8.74
8.74
7.68
17.60
9.76
9.76
8.58
19.75
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
158
Bloomberg (Equity)
CATERING AB
Market cap (SARm)
15,888
14,879
Sector
Commercial Services
Contact
+971 4 423 6932
Price relative

Year to
4
.
0
2014
43
2015
abc
Equities
Saudi Arabia
July 2014
Al Khaleej Training &

Education
ALKHLEEJ AB, Price SAR65.54, Not
Rated
Company description
Al Khaleej Training and Education Company,
founded in 1993, is a pioneer in the field of
information technology, English language and
administrative training for both government
enterprises and private sector companies in Saudi
Arabia. The company also provides professional
call centre solutions for public and private
companies in the Kingdom. Apart from the above
areas, Al Khaleej operates online training in
different fields through its E-Learning solutions.
The company currently has c3,500 employees.
Recent news
On 15 July 2014, Al Khaleej reported Q2
2014 results. Net income for the group grew
by 17% during the quarter, implying 29%
growth during the first half of the year.
Operating profit for the quarter was up by
13.5%. Management pointed to increased
sales in the corporate, education and call
centre divisions for the strong performance.
The company has franchise rights to operate

centres for various global providers in the field of
education. These include New Horizons for
computer education, Direct English for English
language training, Crestcom for administrative
training, and OTA (Online Trading Academy) for
training in stock and currency trading.
Financials
Al Khaleej reported 16% revenue growth during
2013, with divisions like information technology
seeing strong growth. The English training
division contributed 31% of revenue, while the
information technology division contributed 28%
of revenue during the year. The groups operating
margin improved by 85bp during the year, leading
to 17% net income growth.
159
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Al Khaleej Training & Education

Valuation data
Year to
12/2010a
12/2011a
12/2012a
12/2013a

395
70
-21
49
-3
49
49
0
45
45
Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
515
83
-22
60
-5
59
59
0
53
53
574
90
-18
72
-7
73
73
0
67
67
664
107
-18
89
-7
85
85
0
79
79

Capex
Dividends
Change in net debt
FCF equity

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Year to
48
-25
-25
-8
-10
23
65
-57
-53
-8
15
24
78
-74
-91
-10
25
4
60
-125
-123
-13
66
-63
17
247
211
33
481
65
110
77
264
447
35
265
239
26
541
61
134
108
309
514
36
321
264
25
644
74
161
136
365
619
36
427
316
28
800
81
243
215
430
772
(SARm)
12/2010a
12/2011a
12/2012a
12/2013a
6.9
37.1
6.2
46.8
9.3
0.2
0.4
6.1
34.7
5.4
43.3
7.9
1.0
0.4
4.7
29.4
4.7
37.3
7.2
0.4
0.4
4.2
27.1
3.9
29.2
6.0
0.1
0.5
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price
Not Rated
(SAR)65.54
Reuters (Equity)
Market cap (USDm)
Country
Analyst
Target price
4290.SE
612
Saudi Arabia
Not Rated
Year to
70
70
65
65
60
55
60
55
50
45
50
45
40
35
40
35
30
30
25
20
2012
Source: HSBC
12/2010a
12/2011a
12/2012a
12/2013a
12.9
6.8
9.1
9.0
8.1
30.2
18.1
23.6
20.6
15.9
11.4
8.4
18.9
23.5
28.1
15.8
19.3
23.8
15.5
16.9
0.9
10.2
17.2
9.5
17.7
12.3
27.7
0.3
1.1
0.6
1.0
10.2
17.1
9.7
16.1
11.7
15.9
0.3
1.3
0.6
0.9
10.9
18.5
10.5
15.6
12.5
13.5
0.4
1.5
0.6
0.9
10.2
18.3
9.9
16.1
13.4
15.8
0.5
2.0
0.3
1.51
1.51
0.25
8.26
1.76
1.76
0.25
9.12
2.25
2.25
0.33
10.99
2.63
2.63
0.42
12.29
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
160
Bloomberg (Equity)
ALKHLEEJ AB
Market cap (SARm)
2,294
Sector Diversified Consumer Services
Contact
Not Rated
Price relative
25
20
2013
Al Khaleej
1
7
.
2
(SAR) Not Rated
2014
Rel to Tadawul
abc
Equities
Saudi Arabia
July 2014
Al Tayyar Travel Group

ALTAYYAR AB, Price SAR130.71,
Not Rated
Company description
Established in 1980, Al Tayyar Travel Group (Al
Tayyar) is among the largest travel and tourism
service providers in Saudi Arabia. The group
provides reservation and ticketing services for
domestic and international flights, trains and
cruise ships. It also provides hotel booking
services in Saudi Arabia. Al Tayyar also organises
special group tours for Hajj and Umrah
programmes. Al Tayyar has subsidiaries in Egypt,
the UAE, Lebanon, Malaysia and Sudan. The
group has more than 300 offices in the Kingdom
along with 20 offices in international locations.
Financials
Al Tayyar reported top-line growth of 16% in
FY13, mainly on the back of growing revenues
from ticketing services. The companys operating
profit grew by 20% and net profit was up by 25%
in FY13.
In terms of divisional performance, as of 2013,
ticketing services contributed 53% in terms of
sales. The second major source of revenue for the
company was from tourism-related services,
which contributed 24% in terms of revenues.
However, in terms of gross profits, ticketing
services accounted for 70% of the total groups
gross profits.
Recent news
On 17 July 2014, Al Tayyar announced Q2
2014 results. Group sales grew by 18% during
the quarter, which led to operating income
growth of 16.8% and net income growth of
8.3%. For H1 2014, net revenue growth was
at 17% with net income growth at 16%
partly due to gains from the sale of property
and equipment.
On 28 May 2014, Al Tayyar announced that it
has signed an acquisition agreement with
CTM that allows it to acquire 100% of the
shares of the British company. The value of
the deal amounted to SAR85m. CTM is
considered one of the top ranking travel and
tourism companies in the UK, operating in the
field of travel and tourism services, as well as
railway tickets beside air transport and ground
services. It also operates in the field of
organising conferences, as well as hotel
accommodation services in Britain, Ireland
and Scotland. Sales of CTM in 2013
amounted to SAR825m.
161
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Al Tayyar Travel Group

Valuation data
Year to
12/2010a
12/2011a
12/2012a
12/2013a

3,824
558
-40
518
0
549
549
-53
496
496
Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
4,607
692
-34
658
0
651
651
-39
612
612
5,390
815
-40
775
-29
796
796
-41
755
755
6,260
940
-45
895
-13
986
986
-43
943
943
839
-70
163
-320
-428
769
624
-94
-85
-493
-17
530
1,224
-182
-481
-307
-95
1,042
2,157
-144
-370
-440
26
2,014
136
450
1,367
380
2,198
893
117
-263
1,160
1,817
144
494
1,412
407
2,240
931
101
-307
1,170
1,833
147
630
2,034
747
3,250
1,471
6
-741
1,723
2,503
139
1,602
3,215
2,117
5,429
2,940
506
-1,611
2,215
3,311

Capex
Dividends
Change in net debt
FCF equity

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Year to
(SARm)
12/2010a
12/2011a
12/2012a
12/2013a
4.7
32.2
9.9
31.6
15.3
3.9
2.0
3.9
26.0
9.8
25.6
15.3
2.7
3.1
3.3
22.1
7.2
20.8
10.0
5.3
2.0
2.9
19.1
5.4
16.6
7.6
10.3
2.8
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price
Not Rated
(SAR) 130.71
Reuters (Equity)
Market cap (USDm)
Country
Analyst
Target price
1810.SE
5,228
Saudi Arabia
Not Rated
Year to
140
130
120
110
100
90
80
70
60
50
40
30
2012
Source: HSBC
12/2010a
12/2011a
12/2012a
12/2013a
24.6
36.1
32.7
30.1
25.4
20.5
24.0
26.9
18.7
23.3
17.0
17.9
17.8
22.2
23.4
16.1
15.3
15.4
23.9
24.9
2.1
27.3
42.8
22.6
14.6
13.6
2.5
33.4
52.3
27.3
15.0
14.3
-0.2
-0.5
-3.2
-0.3
-0.4
-2.0
2.2
30.2
43.8
23.2
15.1
14.4
27.6
-0.4
-0.9
-1.7
1.9
28.5
42.6
17.4
15.0
14.3
72.3
-0.7
-1.7
-1.3
4.14
4.14
2.66
8.53
5.10
5.10
4.11
8.56
6.29
6.29
2.56
13.14
7.86
7.86
3.67
17.30
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
162
Bloomberg (Equity)
ALTAYYAR AB
Market cap (SARm)
19,607
Sector
Hotels, Restaurants & Leisure
Contact
Not Rated
Price relative
140
130
120
110
100
90
80
70
60
50
40
30
2013
Al Tayyar
1
7
.
2
(SAR) Not Rated
2014
Rel to Tadawul
abc
Equities
Saudi Arabia
July 2014
Budget (United International

Transportation Co.)
BUDGET AB, Price SAR79.14, Not
Rated
Company description
Established in 1978, United International
Transportation Co. (UITC) is the market leader in
the vehicle renting and leasing industry in Saudi
Arabia. The company has been operating under a
franchise agreement with Avis-Budget, the global
leader in vehicle rental services.
UITC currently operates a combined rental and
leasing fleet of over 24,000 vehicles and has a
presence in over 95 locations in the Kingdom.
Apart from vehicle rental services, UITC is also
involved in pre-owned car sales. The companys
clients include FMCG companies, banks, courier,
trading as well as construction companies. UITC
also has the largest workshop facility in the
Kingdom and employs more than 1,200 people
across the group.
In terms of margins, even though the company

saw only a slight improvement at the gross margin
level, a significant decrease in general and
administrative expenses as a result of better cost
control and timely collection of trade receivables
led to a strong improvement in operating margin.
Recent news
On 17 July 2014, UITC announced Q2 2014
results. Net income for the quarter was up by
11% with operating income being up by 19%.
The increase in revenues from long-term
rentals along with the gain on sales of
vehicles was pointed out as the main reason
for the strong growth. For H1 2014, net
income was up by 11% and operating income
was up by 30%.
Financials
UITC reported top-line growth of 15% in 2013,
mainly on the back of growing revenues from
long-term rentals of vehicles and trucks.
According to management, the company also
benefited from high demand for short-term car
rental services in the Umrah season in Ramadan
and the summer, mainly in the Western region.
163
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: United International Transportation Co.

Valuation data
Year to
12/2010a
12/2011a
12/2012a
12/2013a

451
260
-216
44
-10
98
98
0
95
95
Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
508
293
-260
34
-9
101
101
0
101
101
582
350
-330
20
-9
125
125
0
126
126
668
435
-487
52
-13
155
155
0
150
150

Capex
Dividends
Change in net debt
FCF equity

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Year to
190
-386
-213
-37
46
-196
350
-511
-332
-41
42
-161
334
-571
-403
-46
109
-238
411
-628
-436
-51
90
-217
0
706
129
11
834
84
271
260
461
823
0
850
153
27
1,003
153
313
286
517
976
0
1,003
115
17
1,146
106
423
405
593
1,129
0
1,153
161
27
1,342
111
513
486
688
1,315
(SARm)
12/2010a
12/2011a
12/2012a
12/2013a
8.2
14.2
4.5
25.5
5.2
-6.1
1.5
7.3
12.6
3.8
24.0
4.7
-5.0
1.7
6.4
10.6
3.3
19.2
4.1
-7.4
1.9
5.5
8.5
2.8
16.1
4.7
-6.7
2.1
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price
(SAR) 79.14
Reuters (Equity)
Market cap (USDm)
Country
Analyst
Target price
4260.SE
858
Saudi Arabia
Not Rated
12/2010a
12/2011a
12/2012a
12/2013a
8.9
-0.9
56.7
11.3
10.5
12.7
12.8
-24.1
3.0
6.2
14.6
19.3
-41.2
24.4
24.9
14.8
24.4
162.5
23.3
19.4
0.5
11.5
20.6
11.4
57.7
9.8
25.8
0.6
1.0
0.7
0.5
10.3
19.5
10.0
57.7
6.6
30.9
0.6
1.0
1.2
0.5
11.1
21.2
11.0
60.1
3.4
36.9
0.7
1.2
0.8
0.5
11.4
21.8
11.2
65.1
7.7
34.3
0.7
1.1
0.8
3.11
3.11
1.20
15.15
3.30
3.30
1.35
17.00
4.13
4.13
1.50
19.46
4.93
4.93
1.68
16.92
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
164
Bloomberg (Equity)
Market cap (SARm)
Sector
Contact
BUDGET AB
3,218
Road & Rail
Not Rated
100
100
90
90
80
80
70
70
60
60
50
50
40
40
30
30
20
2012
Source: HSBC
1
7
.
2
(SAR) Not Rated
Price relative
20
2013
Budget
Year to
Not Rated
2014
Rel to Tadawul
abc
Equities
Saudi Arabia
July 2014
eXtra (United Electronics Co.)

EXTRA AB, Price SAR124.25, Not
Rated
Company description
Established in 2003, United Electronics Company
(eXtra) is one of the largest consumer electronics
retailers in Saudi Arabia. The companys core
activities include the retailing of consumer
electronics, home appliances, mobile
communication solutions, digital imaging
equipment and gaming consoles. As of June 2014,
eXtra operated 38 stores across Saudi Arabia (with
approximately 5,000 sqm for large stores and
2,000 sqm for small stores). The company has a
major presence in Riyadh, where it operates eight
stores. Outside Saudi Arabia, the company has
operations in Oman and Bahrain. The company
also has plans to open stores in Qatar. Al Fowzan
Holding Company is currently the major
shareholder with a 45% stake in the company.
Financials
eXtra reported top-line growth of 12.4% in FY13
as the company significantly increased its store
count from 29 to 37 during the year. However, in
Q4 2013, the company saw a 5.1% drop in net
sales revenue on a y-o-y basis as it had hosted the
yearly mega sale event in the third quarter of
2013 instead of the fourth quarter, when it
generally hosts the event.
In terms of margins, even though on a full-year

basis gross margins saw a slight improvement,
increasing operational costs from accelerated store
openings during the year led to a 30bp drop in the
operating margin of the company. During the
fourth quarter the company gross margins saw a
significant improvement of 170bp due to the shift
in the timing of yearly mega sale event.
The company reported SAR167m net income for
FY13, implying 5% y-o-y growth; however, for
Q4 2013, the net income growth was slower, at
1%, due to the aforementioned factors.
Recent news
On 17 July 2014, eXtras management
announced Q2 2014 results. Net revenue
growth for the quarter was 1.3%, mainly due
to a high base effect, as Q2 2013 included 10year anniversary promotion sales. Excluding
the promotional sales, net revenue growth for
Q2 2014 was 27.6%. Net income for Q2 2014
was up by 1%, while net income growth in
H1 2014 was 4.4%.The group added one new
store during the quarter, taking the total store
number to 38.
165
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: United Electronics (eXtra)

Valuation data
Year to
12/2010a
12/2011a
12/2012a
12/2013a

1,706
46
-19
27
-4
100
100
0
98
98
Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
2,366
62
-22
40
-1
135
135
0
132
132
3,013
190
-28
161
0
163
163
0
159
159
3,383
206
-38
168
-1
172
172
0
167
167

Capex
Dividends
Change in net debt
FCF equity

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Year to
7
-115
-113
0
-70
-109
129
-72
-73
0
-18
56
153
-109
-109
-60
0
44
153
-107
-107
-98
40
46
0
267
322
30
589
304
21
-9
243
559
0
317
457
65
775
370
0
-65
375
710
0
390
556
48
946
439
0
-48
473
898
0
459
594
35
1,053
486
40
5
488
1,018
(SARm)
12/2010a
12/2011a
12/2012a
12/2013a
2.2
81.5
6.7
38.1
15.3
-2.9
0.0
1.6
60.1
5.3
28.2
9.9
1.5
0.0
1.2
19.7
4.2
23.5
7.9
1.2
1.6
1.1
18.1
3.7
22.3
7.6
1.2
2.6
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price
Not Rated
(SAR) 124.25
Reuters (Equity)
Market cap (USDm)
Country
Analyst
Target price
4003.SE
994
Saudi Arabia
Not Rated
Year to
12/2011a
12/2012a
12/2013a
20.6
29.0
73.0
134.9
138.1
38.7
35.5
48.3
35.4
35.1
27.4
20.5
20.1
12.3
8.7
4.1
5.4
5.5
3.1
17.5
40.2
16.6
2.7
1.6
10.5
0.0
-0.2
-0.7
3.3
18.6
35.2
17.0
2.6
1.7
93.8
-0.2
-1.0
-2.0
3.4
17.7
33.6
16.8
6.3
5.4
3.3
16.4
34.3
15.9
6.1
5.0
-0.1
-0.3
-3.2
0.0
0.0
29.5
3.26
3.26
0.00
8.11
4.40
4.40
0.00
12.51
5.29
5.29
2.00
15.75
5.58
5.58
3.25
16.27
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
166
EXTRA AB
3,728
Specialty Retail
Not Rated
130
130
120
120
110
110
100
100
90
90
80
80
70
70
60
60
50
2012
Source: HSBC
12/2010a
Bloomberg (Equity)
Market cap (SARm)
Sector
Contact
Price relative
50
2013
Extra
1
7
.
2
(SAR) Not Rated
2014
Rel to Tadawul
abc
Equities
Saudi Arabia
July 2014
Farm Superstores (Saudi

Marketing Co.)
SMARKETI AB, Price SAR128.49,
Not Rated
Company description
SAMCO operates retail stores and indoor
entertainment centres in Saudi Arabia, as well as a
shopping mall in Lebanon. Established in 1978,
SAMCO opened its first retail outlet (Farm
Superstore 1) in Dammam in October 1979. As of
June 2014, Farm was operating 48 supermarkets,
20 mini markets, thee wholesale outlets as well as
seven indoor entertainment centres, under its
Adventures World brand. The company also owns
Beirut Mall in Lebanon, which hosts over 50
tenants in an area of 50,000 m2.
The company plans to open five supermarkets,
two mini markets, and one indoor entertainment
centre in H2 2014. Lacking a presence in the
Central region of Saudi Arabia, SAMCO is
leasing a retail area of 8,974 m2, distributed over
three stores in Riyadh. The company also seeks to
improve its margins by introducing store-branded
products, such as apparel and bottled water, and
shifting its sales mix towards higher margin
offerings such hardware, gifts and toys.
Financials
In F13 (ended 31 December 2013), the company
posted revenue growth of 9%, slowing its pace
from a CAGR of 15% in 2009-12. However, gross
margins improved by nearly 2pp from 20% to
22%. Sub-leases accounted for 10% of SAMCOs
revenues in FY13.
As of Q2 2014 (ended 30 June 2014), the
company posted revenue growth of 23% y-o-y,
partly due to pre-buying for Ramadan, as well as
due to three new store openings.
Recent news
On 10 July 2014, SAMCO announced plans
to increase its capital from SAR250m to
SAR350m via capitalisation of its retained
earnings. The company plans to issue bonus
shares to current shareholders at a rate of 2:5.
On 22 May 2014, SAMCO announced the
opening of a branch in the city of Arar, in the
Northern region of Saudi, with an area of
3,524 m2.
On 1 May 2014, SAMCO announced that it
will cease Farm Superstore operations in
Lebanon, instead leasing the space on a 10year contract for an annual amount of
SAR1.88m.
167
abc
Equities
Saudi Arabia
July 2014
Financials & valuation:
Farm Superstores (Saudi Marketing)
Valuation data
Year to
12/2010a
12/2011a
12/2012a
12/2013a

997
79
-23
56
-2
58
58
0
56
56
Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
1,253
86
-24
62
0
70
70
-1
67
67
1,496
99
-27
72
-4
82
82
-1
79
79
1,626
124
-29
94
-5
99
99
0
95
95

Capex
Dividends
Change in net debt
FCF equity

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Year to
60
-66
-66
0
0
-1
129
-77
-82
0
-39
53
163
-98
-88
-11
-49
66
20
-64
-54
0
35
-44
7
396
318
17
724
158
247
229
287
707
6
448
308
20
765
193
208
188
348
744
5
517
362
38
886
293
159
120
414
848
4
547
377
35
929
304
193
158
392
894
(SARm)
12/2010a
12/2011a
12/2012a
12/2013a
3.2
40.7
4.5
57.3
11.2
-0.2
0.0
2.6
37.1
4.3
48.3
9.2
1.6
0.0
2.1
32.3
3.8
40.8
7.8
2.0
0.3
2.0
26.0
3.6
33.8
8.2
-1.4
0.0
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price
Not Rated
(SAR) 128.49
Reuters (Equity)
Market cap (USDm)
Country
Analyst
Target price
4006.SE
857
Saudi Arabia
Not Rated
Year to
150
140
130
120
110
100
90
80
70
60
50
40
30
2012
Source: HSBC
12/2010a
12/2011a
12/2012a
12/2013a
10.9
22.1
16.5
24.0
23.8
25.7
9.4
11.0
21.2
18.7
19.4
14.8
16.2
17.8
18.3
8.7
24.5
30.0
20.1
20.8
1.4
7.9
19.5
7.7
7.9
5.6
52.3
0.8
2.9
0.3
1.7
8.9
19.1
8.7
6.9
5.0
208.2
0.5
2.2
0.7
1.8
9.3
19.0
8.9
6.6
4.8
24.5
0.3
1.2
1.4
1.8
10.6
24.3
10.2
7.6
5.8
26.8
0.4
1.3
0.1
2.24
2.24
0.00
11.49
2.66
2.66
0.00
13.91
3.15
3.15
0.42
16.56
3.81
3.81
0.00
15.69
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
168
Bloomberg (Equity)
SMARKETI AB
Market cap (SARm)
3,212
Sector
Food & Staples Retailing
Contact
Not Rated
Price relative
150
140
130
120
110
100
90
80
70
60
50
40
30
2013
Farm Superstores
1
7
.
2
(SAR) Not Rated
2014
Rel to Tadawul
abc
Equities
Saudi Arabia
July 2014
Halwani Brothers
HB AB, Price SAR82.80, Not Rated
Company description
Established in 1968, Halwani Brothers is engaged
in the production, marketing and distribution of
food products, mainly in Saudi Arabia and Egypt.
Halwani also exports its products to more than
32 countries around the world. In Saudi Arabia,
Halwani has a dominant market share in
five products.
Recent news
On 14 July 2014, Halwani reported Q2 2014
results. Net revenue growth for the quarter
came in at 15% with operating profit growing
at 16.6%. However, net income growth
slowed down to 5.5% due to higher corporate
tax expenses.
The main line of business includes two products

made from sesame seeds: halawa and tahina (which
is also an ingredient of halawa). Other key products
include, jam, pastries, dates and cold cut meat. Apart
from these, Halwani also has a presence in other
segments like juice and dairy (yogurt and labneh)
within Saudi Arabia. The company manufactures
and distributes a range of moistened tissues for
different uses. The principal business in Egypt is the
cold cut meat business, in which Halwani is the
market leader. Currently, Dallah Industrial
Investment is the major shareholder in the company
with more than a 55% holding.
Financials
Halwani reported net revenue growth of 7.4% in
2013 with operating income growing by 10.8%.
Management pointed to the strong improvement
in operating cost control, which led to an
operating margin improvement of 40bp. Gross
margins of the group dropped 80bp during the
year. The company reported net income growth of
6% during the year.
169
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Halwani Brothers

Valuation data
Year to
12/2010a
12/2011a
12/2012a
12/2013a

732
116
-18
98
0
101
101
-11
80
80
Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
814
124
-19
104
0
109
109
-20
81
81
892
143
-24
119
3
119
119
-23
87
87
958
157
-25
132
-1
131
131
-30
93
93

Capex
Dividends
Change in net debt
FCF equity

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Year to
74
-73
-71
-29
0
1
114
-78
-77
-43
13
37
116
-48
-47
-57
16
68
101
-113
-111
-57
45
-12
0
209
444
117
653
117
0
-117
508
536
0
266
423
121
689
108
13
-108
538
568
0
288
457
144
745
124
29
-116
561
601
0
368
463
113
831
146
69
-44
581
717
(SARm)
12/2010a
12/2011a
12/2012a
12/2013a
3.2
20.1
4.3
29.4
4.7
0.0
1.2
2.9
18.8
4.1
29.4
4.4
1.5
1.8
2.6
16.3
3.9
27.2
4.2
2.9
2.4
2.4
14.8
3.2
25.6
4.1
-0.5
2.4
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price
Not Rated
(SAR) 82.80
Reuters (Equity)
Market cap (USDm)
Country
Analyst
Target price
6001.SE
631
Saudi Arabia
Not Rated
Year to
12/2011a
12/2012a
12/2013a
18.6
41.7
56.6
77.4
88.6
11.2
7.0
6.9
8.3
0.2
9.7
15.5
13.7
9.2
8.0
7.4
9.9
10.8
10.2
6.3
1.4
15.0
15.8
12.3
15.8
13.4
1.4
14.2
15.0
11.7
15.2
12.8
1.5
14.5
15.5
11.7
16.0
13.3
1.3
12.9
15.9
11.1
16.4
13.7
-0.2
-1.0
-0.6
-0.2
-0.9
-1.1
-0.2
-0.8
-1.0
-0.1
-0.3
-2.3
2.81
2.81
1.00
17.76
2.82
2.82
1.50
18.82
3.05
3.05
2.00
19.64
3.24
3.24
2.00
20.34
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
170
HB AB
2,366
Food Products
Not Rated
90
90
80
80
70
70
60
60
50
50
40
40
30
2012
Source: HSBC
12/2010a
Bloomberg (Equity)
Market cap (SARm)
Sector
Contact
Price relative
30
2013
Halwani
1
7
.
2
(SAR) Not Rated
2014
Rel to Tadawul
abc
Equities
Saudi Arabia
July 2014
Saudia Dairy & Foodstuff

Company
SADAFCO AB, Price SAR110.80, Not
Rated
Company description
Established in 1976, Saudia Dairy & Foodstuff
Company (Sadafco) is one of the major players in
the Kingdoms dairy market. The company also
manufactures tomato paste, ice cream, snacks and
drinks. Sadafco is the leader in Saudis long-life milk
segment and has dominated close to one-third of the
total drinking milk market in the Kingdom. Over the
last few years the company has increased its offering
to include cheese, butter and powdered milk, as well
as frozen French fries. The companys major
manufacturing facilities are in Jeddah and Dammam.
The company also has 19 distribution centres across
the Kingdom. Sadafco also operates three
international distribution centres in Qatar, Bahrain
and Jordan. Qurain Petrochemical Industries is the
major shareholder in Sadafco with a 29% stake.
Recent news
On 17 July 2014, Sadafcos management
announced Q1 2014 (ending June 2014)
results. Net income for the quarter grew by
2.4% with operating income growing by 3%.
Management pointed to slow growth in sales
revenue for the weaker performance.
Financials
In FY14 (period ending March 2014), Sadafco
reported 0.2% top-line growth. The slow growth was
mainly due to non-supply of water by the
International Water Distribution Company (Tawzea)
for over a month between July and August 2013,
resulting in the loss of sale orders of SAR30m.
Sadafcos gross margins improved by 85bp y-o-y on
the back of a better product mix and improving
production efficiencies. The companys operating
margins also improved in FY14 by 50bp, while net
income grew by 4% on a y-o-y basis.
171
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Saudi Dairy and Foodstuff Co.

Valuation data
Year to
03/2011a
03/2012a
03/2013a
03/2014a

1,134
165
-40
126
0
146
146
0
132
132
Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
1,336
195
-41
154
0
164
164
0
152
152
1,549
221
-46
176
0
179
179
0
164
164
1,553
241
-57
184
0
186
186
0
171
171
73
-68
-9
-49
0
5
56
-96
-245
-98
0
-40
169
-147
-71
-98
0
23
213
-135
-56
-98
0
78
0
268
806
338
1,074
272
0
-338
730
736
0
323
773
202
1,096
238
0
-202
783
894
0
422
680
128
1,103
174
0
-128
849
975
0
498
640
113
1,138
135
0
-113
922
1,025

Capex
Dividends
Change in net debt
FCF equity

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Year to
(SARm)
03/2011a
03/2012a
03/2013a
03/2014a
3.1
21.1
4.7
27.3
4.9
0.1
1.4
2.6
17.9
3.9
23.7
4.6
-1.1
2.7
2.3
15.7
3.6
21.9
4.2
0.6
2.7
2.2
14.5
3.4
21.0
3.9
2.2
2.7
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price
Not Rated
(SAR)110.80
Reuters (Equity)
Market cap (USDm)
Country
Analyst
Target price
2270.SE
960
Saudi Arabia
Not Rated
Year to
03/2012a
03/2013a
03/2014a
10.9
14.8
-0.9
-33.3
-36.0
17.7
17.8
22.4
12.3
15.2
16.0
13.7
14.1
8.7
8.1
0.2
8.8
4.8
4.2
4.2
1.5
17.9
18.1
12.3
14.6
11.1
1.5
17.0
19.4
13.9
14.6
11.5
1.6
16.9
19.4
14.9
14.3
11.3
1.5
16.7
18.6
15.0
15.5
11.8
-0.5
-2.0
-0.2
-0.3
-1.0
-0.3
-0.2
-0.6
-1.3
-0.1
-0.5
-1.9
4.06
4.06
1.50
22.46
4.68
4.68
3.00
24.10
5.06
5.06
3.00
26.12
5.27
5.27
3.00
28.35
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
172
SADAFCO AB
3,601
Food Products
Not Rated
120
120
110
110
100
100
90
90
80
80
70
70
60
60
50
50
40
2012
Source: HSBC
03/2011a
Bloomberg (Equity)
Market cap (SARm)
Sector
Contact
Price relative
40
2013
SADAFCO
1
7
.
2
(SAR) Not Rated
2014
Rel to Tadawul
abc
Equities
Saudi Arabia
July 2014
Saudi Automotive
Services Co.
SACO AB, Price SAR31.80, Not
Rated
Company description
SASCO was established in 1982. It owns and
operates gas stations, auto service centres,
highway motels and restaurants, as well
convenience stores inside cities and on highways.
In its petroleum retail segment, the company
operates 74 gas stations and 15 quick service
centres. Of the 89 sites, three are scheduled to
cease operations due to lacklustre performance
and 38 sites are under construction. In 2013, the
segment serviced 6.9m vehicles, or 37m
travellers, posting an increase of 9% y-o-y.
In its other segments, SASCO owns and operates 30
convenience stores under its SASCO Palm brand, 10
coffee shops under its Palm Caf brand, as well as
motels, restaurants and auto service centres in some
of its gas station across Saudi Arabia. The company
also owns a transportation fleet of 55 tankers and 61
trailers, servicing both SASCO branches as well as
non-affiliated customers.
As a result of price ceilings as well as government

subsidies of fuel prices, SASCO maintains stable
margins in its petroleum segment, at SAR0.09/l
for petroleum and SAR0.035/l for diesel.
In H 2014 (ended 30 June 2014), SASCO posted
69% y-o-y growth in net income, largely due to the
liquidation of its equities portfolio. During the same
period it posted an 11.3% increase in sales, y-o-y,
with gross margins in line with previous years.
Recent news
On 16 July 2014, SASCO announced the
distribution of six-month dividends to
shareholders in the amount of SAR33.75m, at
a DPS of SAR0.75, or 7.5% of book value.
On 25 June 2014, SASCO announced the
completion of the liquidation of its equities
portfolio, for a total amount of SAR194m.
The company aims to invest the proceeds into
its core activities in line with its strategic
goals and expansion plans.
Financials
In 2009-13, SASCO sales posted a CAGR of
18%, mainly driven by its petroleum retail
operations, which accounted for 89% of sales in
2013. The Central region accounted for 41% of
2013 sales, up from 39% in 2012, outgrowing
other regions of operations.
173
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Saudi Automotive Services

Valuation data
Year to
12/2010a
12/2011a
12/2012a
12/2013a

213
21
-11
11
0
37
37
0
36
36
Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
244
19
-14
5
0
41
41
0
40
40
345
21
-14
7
0
46
46
0
45
45
370
24
-16
8
-1
44
44
0
40
40

Capex
Dividends
Change in net debt
FCF equity

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Year to
51
-113
-114
-23
0
-62
39
-107
-84
0
61
-63
84
-245
-229
0
89
-153
43
-97
-76
0
106
-54
0
280
108
59
587
72
0
-59
513
529
0
351
129
57
678
81
0
-57
544
621
0
573
170
91
933
86
150
59
694
843
0
624
247
131
1,085
97
256
125
729
955
(SARm)
12/2010a
12/2011a
12/2012a
12/2013a
7.3
73.3
2.9
39.7
2.8
-4.4
1.6
6.4
80.4
2.5
35.7
2.6
-4.8
0.0
4.5
74.3
1.8
31.8
2.1
-11.2
0.0
4.2
63.5
1.6
36.0
2.0
-3.7
0.0
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price
Not Rated
(SAR)31.80
Reuters (Equity)
Market cap (USDm)
Country
Analyst
Target price
4050.SE
382
Saudi Arabia
Not Rated
Year to
40
40
30
30
20
20
10
10
0
2012
Source: HSBC
12/2010a
12/2011a
12/2012a
12/2013a
11.8
21.2
39.5
6.2
14.3
14.5
-8.9
-50.7
8.8
11.3
41.4
8.3
38.5
14.1
12.5
7.1
16.9
16.5
-4.5
-11.7
0.4
6.8
7.0
6.1
10.0
5.0
0.4
6.5
7.4
5.9
7.9
2.1
0.4
5.3
6.5
4.8
6.1
2.1
-0.1
-2.8
-0.9
-0.1
-2.9
-0.7
0.1
2.8
1.4
0.4
4.2
5.5
3.7
6.6
2.3
25.8
0.2
5.1
0.3
0.80
0.80
0.50
11.39
0.89
0.89
0.00
12.10
1.00
1.00
0.00
15.42
0.88
0.88
0.00
16.19
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
174
Bloomberg (Equity)
SACO AB
Market cap (SARm)
1,431
Sector
Commercial Services
Contact
Not Rated
Price relative
0
2013
Saudi Automotive Svs
1
7
.
2
(SAR) Not Rated
2014
Rel to Tadawul
abc
Equities
Saudi Arabia
July 2014
Saudi Ceramic Co.

SCERCO AB, Price SAR139.58, Not
Rated
Company description
Established in 1977, Saudi Ceramics
manufactures and markets ceramic and porcelain
tiles, sanitary ware, ceramic road markers,
electrical water heaters and bathroom accessories.
The company currently has 11 plants and employs
3,600 individuals.
Saudi Ceramics has an annual capacity of 1.5m
electrical water heater units, 64m sqm of ceramic
and porcelain tiles, 6m pieces of decorative tiles,
2.5m pieces of sanitary ware, 1.8m pieces of ceramic
road markers and 5m pieces of tile accessories. The
company has plans to increase its production
capacity to 3.5m pieces for sanitary ware.
Saudi Ceramics sells its products through multiple
outlets, including showrooms, wholesale
distribution and direct exports. The company
currently has a chain of 30 showrooms across the
major cities of Saudi Arabia, along with a wide
network of distributors across the Kingdom. It
also exports its products to more than 70 countries
in the GCC, Africa, Russia and Europe.
Financials
On 16 January 2014, Saudi Ceramic Co
announced Q4 2013 results. The companys net
income for the quarter grew by 11%, while
operational profit for the quarter remained more
or less flat. A lower zakat provision during the
quarter led to the growth in net income. For FY13,
the company reported net income growth of 25%
and operational profit growth of 28%.
Management pointed to higher production
volumes and an increase in sales for the growth in
the bottom line.
Recent news
On 14 July 2014, Saudi Ceramic Co
announced Q2 2014 results. Net income for
the quarter was up by 2%, implying 4%
growth for H1 2014. Operating income for the
quarter was down 12% with H1 2014
operating profits dropping by 7.5%.
175
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Saudi Ceramics Co.

Valuation data
Year to
12/2010a
12/2011a
12/2012a
12/2013a

1,080
323
-101
222
-9
226
226
0
221
221
Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
1,221
365
-121
244
-17
239
239
0
232
232
1,447
387
-129
258
-16
261
261
0
248
248
1,601
472
-140
331
-12
322
322
0
309
309
180
-184
-172
-76
72
-5
355
-276
-286
-88
45
79
298
-286
-311
0
95
12
483
-376
-373
0
-30
107
0
1,259
622
39
1,935
118
775
736
1,004
1,896
0
1,415
793
64
2,269
253
820
756
1,147
2,205
0
1,572
893
57
2,546
285
904
846
1,306
2,488
0
1,806
922
42
2,806
350
874
832
1,521
2,764

Capex
Dividends
Change in net debt
FCF equity

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Year to
(SARm)
12/2010a
12/2011a
12/2012a
12/2013a
5.6
18.8
3.2
23.7
5.2
-0.1
1.5
5.0
16.6
2.8
22.6
4.6
1.5
1.7
4.2
15.7
2.4
21.1
4.0
0.2
0.0
3.8
12.9
2.2
16.9
3.4
2.0
0.0
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price
Not Rated
(SAR) 139.58
Reuters (Equity)
Market cap (USDm)
Country
Analyst
Target price
2040.SE
1,396
Saudi Arabia
Not Rated
Year to
150
150
140
140
130
130
120
120
110
110
100
100
90
90
80
80
70
70
60
2012
Source: HSBC
12/2010a
12/2011a
12/2012a
12/2013a
12.7
14.3
13.0
13.1
11.9
13.1
12.9
9.7
5.4
5.2
18.5
6.1
5.8
9.3
6.7
10.6
21.9
28.4
23.4
25.0
0.6
11.6
22.0
11.4
29.9
20.6
36.3
0.7
2.3
0.2
0.6
10.5
20.2
10.2
29.8
20.0
21.3
0.7
2.1
0.5
0.6
9.9
19.0
9.7
26.7
17.8
23.7
0.6
2.2
0.4
0.6
11.2
20.3
11.0
29.5
20.7
38.8
0.5
1.8
0.6
5.88
5.88
2.04
26.77
6.19
6.19
2.36
30.58
6.60
6.60
0.00
34.82
8.25
8.25
0.00
40.56
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
176
Bloomberg (Equity)
SCERCO AB
Market cap (SARm)
5,234
Sector
Building Products
Contact
Not Rated
Price relative
60
2013
Saudi Ceramics
1
7
.
2
(SAR) Not Rated
2014
Rel to Tadawul
abc
Equities
Saudi Arabia
July 2014
Saudi Fisheries Co.

SFICO AB, Price SAR38.28, Not
Rated
Company description
Founded in 1981, Saudi Fisheries is engaged in
fishing, fish and shrimp farming, as well as the
sale of frozen and pre-cooked seafood. The
company is involved in the marketing, local
distribution and export of its products. The largest
shareholder is the Saudi government through its
Public Investment Fund (PIF), with a 40% share
as of June 2014.
The company operates two shrimp farms, with a
total capacity of 4,500t/annum. An additional
capacity of 3,000t/annum of shrimp is planned
over the next three years. Saudi Fisheries also
operates a freshwater fish farm, as well as five
processing plants with a combined capacity of
13,000mt/annum and 6,000mt/annum of fish and
shrimp, respectively.
In H1 2014 (ended 30 June 2014), Saudi Fisheries

reported a net loss of SAR24m, compared to
SAR23m over the same period in 2013.
Management cited higher operating and selling
costs as reasons behind the increased losses.
Recent news
On 21 July 2014, Saudi Fisheries reiterated its
capex plans, announced in its prospectus, of
SAR116.6m, allocated out of the companys
IPO proceeds of SAR335.4m. The plans
include provisions for a farm and processing
plant for shrimp, additions to the distribution
network, as well as opening new outlets and
the maintenance of existing facilities.
On 17 April 2014, Saudi Fisheries announces
the receipt of lands from the Public
Investment Fund (PIF), for which additional
shares are to be issued to the PIF.
In 2013, the sale of fish accounted for 76% of

revenue of Saudi Fisheries, while the sale of
shrimp contributed 15%, and the sale of other
products accounted for 10% of revenue.
Financials
In FY13, Saudi Fisheries reported top-line growth
of 10%. However, in 2009-12, the companys
sales contracted at a compound annual rate of
16%. The company has been registering losses
since 2009, with cumulative losses at
SAR233.8m, or 44% of its capital as of FY13.
177
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Saudi Fisheries Co.

Valuation data
Year to
12/2010a
12/2011a
12/2012a
12/2013a

98
-11
-12
-24
-1
-26
-26
0
-27
-27
Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
87
-13
-8
-21
-2
-22
-22
0
-22
-22
70
-26
-11
-36
-2
-34
-34
0
-40
-40
78
-33
-10
-43
-2
-43
-43
0
-49
-49

Capex
Dividends
Change in net debt
FCF equity

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Year to
-26
-13
-13
0
39
-40
1
-7
-7
0
23
-6
-54
-43
-43
0
2
-97
-20
-13
-13
0
3
-33
0
122
74
2
197
31
48
46
109
195
0
121
415
355
536
42
71
-284
413
181
0
156
316
260
472
39
73
-187
351
212
0
159
276
231
436
47
76
-155
302
205
(SARm)
12/2010a
12/2011a
12/2012a
12/2013a
19.4
NM
9.7
NM
13.9
-1.9
0.0
21.9
NM
10.5
NM
13.9
-0.3
0.0
26.9
NM
8.9
NM
13.9
-4.7
0.0
24.4
NM
9.3
NM
13.9
-1.6
0.0
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price
Not Rated
(SAR)38.28
Reuters (Equity)
Market cap (USDm)
Country
Analyst
Target price
6050.SE
547
Saudi Arabia
Not Rated
Year to
12/2011a
12/2012a
12/2013a
-17.1
-9.8
-7.0
-4.3
-6.2
-11.6
12.5
-11.4
-18.8
-18.1
-18.7
98.8
71.0
59.8
81.2
10.2
29.1
18.8
23.8
22.8
0.5
-13.8
-24.7
-13.7
-11.7
-24.5
0.5
-12.2
-5.3
-4.1
-14.9
-24.5
0.3
-18.8
-11.4
-8.4
-36.5
-51.6
0.4
-4.0
-0.6
-0.7
22.0
0.0
-0.5
7.3
0.3
0.4
-23.9
-16.2
-11.2
-42.7
-55.5
-14.3
-0.5
4.7
0.1
-0.50
-0.50
0.00
2.74
-0.41
-0.41
0.00
2.74
-0.75
-0.75
0.00
2.74
-0.91
-0.91
0.00
2.74
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
178
SFICO AB
2,049
Food Products
Not Rated
50
50
40
40
30
30
20
20
10
2012
Source: HSBC
12/2010a
Bloomberg (Equity)
Market cap (SARm)
Sector
Contact
Price relative
10
2013
Saudi Fisheries
1
7
.
2
(SAR) Not Rated
2014
Rel to Tadawul
abc
Equities
Saudi Arabia
July 2014
Shaker (Al Hassan Ghazi

Ibrahim Shaker Co)
SHAKER AB, Price SAR83.96, Not
Rated
Company description
The parent company of Shaker Group was
established in 1950 for the import and wholesale
of air conditioners and home appliances.
Currently, Shaker Co. is the main distributor in
Saudi Arabia for eight brands of air conditioners
and home appliances through its sales outlets,
service centres and warehouses. Brands
distributed by Shaker Company include LG,
Ariston, Indesit, Maytag, DeLonghi, American
Standard and McQuay. The company also sells
some products under its own brand name.
Currently, the group operates four subsidiaries
through its holding company, Al Hassan Ghazi
Ibrahim Shaker Company:
Ibrahim Shaker Company Limited: Established in
1982, the company undertakes wholesale and retail
of home appliances, including kitchen appliances,
water coolers and air conditioning units.
Ibrahim Hussein Shaker Project and Maintenance
Company: Established in 2006, the company
focuses on providing services to government
entities and projects.
LG Shaker Company: A joint venture between
Koreas LG Electronics and Shaker Company, the
company has manufactured LG air conditioning
units under licence in Saudi Arabia since 2006.
New Vision for Electronics and Electrical

Appliances: Incorporated in Jordan, the company
produces and distributes household, electrical and
electronic appliances.
Financials
In 2013 Shaker Co. reported 2% top-line growth,
which was relatively low compared to earlier
years, mainly due to increasing competition in the
sector. The companys operating margin for the
period saw a 2.75pp drop due to the increasing
cost of marketing in the wake of increasing
competition, although the gross margin improved
by 12bp y-o-y.
Recent news
On 22 July 2014, Shakers management
announced that Ibrahim Hussein Shaker
Projects and Maintenance Company, one of
its fully owned subsidiaries, has been
awarded a contract worth SAR38m by the
Ministry of Education to supply air
conditioning units to a number of its
associated schools located in several regions
across the Kingdom.
On 20 July 2014, Shaker announced Q2 2014
results. Net income for the quarter came in at
SAR382m compared to SAR75m in Q2 2013,
due to one-off gains, while operating income
for the quarter was down 11%.
179
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Al Hassan Ghazi Ibrahim Shaker Co.

Valuation data
Year to
12/2010a
12/2011a
12/2012a
12/2013a

1,156
197
-17
180
-3
182
182
-6
145
145
Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
1,566
239
-24
215
-11
206
206
-4
180
180
1,707
270
-30
240
-16
226
226
-6
188
188
1,741
226
-30
196
-19
178
178
-8
125
125

Capex
Dividends
Change in net debt
FCF equity

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Year to
159
-96
-96
-105
57
63
-45
-73
-72
-123
237
-118
133
-40
-39
-140
62
93
88
-32
-38
0
-36
56
1
242
626
52
874
188
180
128
423
822
1
290
917
61
1,213
203
418
356
481
1,151
0
300
1,052
75
1,357
212
481
405
528
1,282
0
301
1,176
89
1,489
219
445
356
654
1,400
(SARm)
12/2010a
12/2011a
12/2012a
12/2013a
2.8
17.1
4.4
22.2
7.7
6.6
4.0
2.4
14.1
3.4
20.2
7.0
2.6
3.6
1.8
11.7
2.4
16.3
6.1
-4.8
4.2
1.6
10.3
2.2
15.7
5.6
3.8
4.8
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price
Not Rated
(SAR)83.96
Reuters (Equity)
Market cap (USDm)
Country
Analyst
Target price
1214.SE
648
Saudi Arabia
Not Rated
Year to
12/2011a
12/2012a
12/2013a
8.7
38.0
39.1
39.1
28.6
15.8
20.7
18.3
18.1
9.6
35.5
21.3
19.0
13.0
24.1
9.0
13.0
11.7
10.1
4.1
1.6
20.9
34.6
20.1
16.4
15.3
73.2
0.2
0.4
3.2
1.4
17.7
34.3
16.6
17.0
15.6
61.2
0.3
0.6
1.2
1.4
15.7
37.5
14.9
15.3
13.7
20.9
0.7
1.5
-0.1
1.3
14.6
35.5
13.8
15.8
14.0
17.2
0.8
1.5
0.3
3.78
3.78
3.35
10.91
4.15
4.15
3.00
12.06
5.15
5.15
3.50
13.71
5.36
5.36
4.00
15.09
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
180
SHAKER AB
2,431
Distributors
Not Rated
100
100
90
90
80
80
70
70
60
60
50
50
40
2012
Source: HSBC
12/2010a
Bloomberg (Equity)
Market cap (SARm)
Sector
Contact
Price relative
40
2013
Shaker
1
7
.
2
(SAR) Not Rated
2014
Rel to Tadawul
Equities
Saudi Arabia
July 2014
abc
Healthcare
181
abc
Equities
Saudi Arabia
July 2014
Healthcare
The proportion of Saudi citizens in the 65+ age group is projected
to grow at 6% pa as per UN estimates until 2025 as a result of

falling birth and mortality rates
This will likely increase the incidence of lifestyle diseases, which
the current infrastructure is ill-equipped to deal with

The shortfall in healthcare infrastructure means that the private
sector will likely play an increasing role in satisfying demand
Higher growth to come

Even after rising by c40% between 2009 and 2012,
healthcare spending levels and related infrastructure
in Saudi Arabia remain well below those seen in
developed markets or even some emerging markets.
We believe this indicates significant structural
growth potential for the sector, especially as the
living standard of the people in the Kingdom
improves and they start using more healthcare
services. We believe a host of factors will come into
play in the medium term which could lead to strong
growth in these spending levels.
Healthcare spend per capita (USD, 2012)
These include increasing penetration of medical

insurance among Saudi citizens, which should
drive higher usage levels; an ageing population,
with the proportion of people above sixty almost
doubling by 2020 according to UN estimates; and
the growing prevalence of lifestyle diseases like
obesity, diabetes and hypertension. These
structural growth factors along with the increasing
presence of private players implies there is a lot
more growth potential left in the sector for the
coming years, in our opinion.
Saudi population breakdown based on age

100%
4%
6%
7%
8%
19%
19%
21%
80%
24%
9,000
7,500
6,000
60%
4,500
3,000
46%
20%
Source: World Bank WDI
US
France
Germany
UK
Qatar
Kuwait
Abu Dhabi
UAE
Dubai
Bahrain
Saudi
Oman
30%
29%
28%
44%
42%
39%
27%
25%
23%
2025
2030
40%
1,500
182
47%
9%
0%
2010
2015
0-14
Source: UN data
2020
15-39
40-59
60+
Raj Sinha*
+971 4423 6932
raj.sinha@hsbc.com
abc
Equities
Saudi Arabia
July 2014
Currently low levels of medical infrastructure along

with government initiatives to shift the burden of
healthcare to the private sector imply a strong
growth in private healthcare spending, in our view.
We believe differentiating among the private
sector hospitals is a matter of verifying whether
they have the accreditation that both insurers and
corporate customers (which deal directly with the
hospitals) require, and whether they are able to
attract and hire the necessary staff. All three Saudi
companies that we cover belong to the select group
that meets these requirements. As such, choosing
between them comes down to valuation and earnings
momentum, in our view.
Hospital competitive
landscape
Admission rate
The admission rate is the ratio of inpatients to
outpatients in a hospital. Generally we find that
hospitals operating margins decrease as the
admission rate increases. Mouwasat has the
lowest admission rate among these three private
hospital operators, but it also has a high bed
occupancy rate, which we believe helps it achieve
comparatively higher margins along with low
staff costs due to its presence outside Riyadh.
Outpatients per clinic

In terms of outpatients per clinic, Mouwasat
appears best placed at first glance, with close to
20% more patients per clinic than Dallah and
around 10% more than NMCC. However, if we
examine the revenue per outpatient, the numbers
corroborate statements from all three management
teams that Dallah targets the Tier 1 segment
whereas Mouwasat targets the segment just
below: revenue per outpatient at Dallah clinics is
almost double that of Mouwasat. Interestingly,
NMCC also has high revenue/outpatient despite
targeting the same segment as Mouwasat. We
believe this to be a function of higher prices and
more procedures per patient as well as NMCCs

presence in the high-priced Riyadh market, where
Mouwasat currently does not have operations. We
would also argue that Mouwasat has been held
back in its pricing through overreliance on
corporate accounts, which accounted for 23% of
its revenues until 2011.
Inpatients per bed

We believe Dallah is the clear leader among the
three major Saudi private hospitals in the inpatient
division, in terms of both inpatients per bed and
revenue per inpatient. Its revenue per inpatient is
almost 40% higher than that of Mouwasat and 70%
higher than that of NMCC. We believe that this is
mainly a reflection of the clients that come to Dallah,
which obtains a higher proportion of its revenues
from cash business (as opposed to insurance
business and corporate accounts), for which the
hospital can increase prices with few constraints.
Revenue streams
Generally hospitals have two main revenue
streams: inpatient and outpatient revenues. In
addition to this, they operate pharmacies and
some also provide operational and maintenance
support to other hospitals, which generates fixed
fee income that attracts lower margins. Dallah
generates around 90% of its revenues from
hospital operations (inpatient and outpatient), but
NMCC and Mouwasat obtain less than 80% of
their revenues from hospitals.
Pharmaceutical sector
In most MENA markets the contribution of the
government to healthcare spending is much lower
than in other regions. Therefore, the shift from
branded generics to plain generics would need to
be driven mostly by consumers rather than the
authorities, in our view. But in most MENA
countries brands have historically ensured a
certain quality of product and unless there are
alternate regulatory mechanisms to convey this
183
abc
Equities
Saudi Arabia
July 2014
assurance, we believe the move towards plain

generics in the MENA region will be slow.
If we look at the Saudi market, the take-up of
generics is still quite weak as it accounts for just
c10% of the prescription drug market (by value).
We believe this is for several reasons:
Manufacturers of originals spend large sums
on sales and marketing in order to persuade
doctors and pharmacists to dispense originals.
Local manufacturers have signed marketing
agreements to sell patented drugs.
The government has to issue licences to
enable companies to manufacture generics.
Until recently this was a rare occurrence.
Delving into the first issue, it is apparent how
important sales and marketing are to the take-up of
products as these costs amount to 24% of
SPIMACOs sales and Tabuk Pharmaceuticals
spends around 50% of its revenues on this area. This
high level of spend is effectively a barrier to entry.
Within the generics segment, the government pricing
mechanism forms another barrier to entry. The first
company to launch a generic for a particular drug
coming off patent is allowed to price it at up to a
20% discount to the price of the original. The second
entry is allowed up to a 40% discount, and the
discount continues to increase thereafter. This,
Breakdown of top nine MENA pharmaceutical markets (2013)

Jordan
2%
Tunisia
5%
Kuw ait
2%
Lebanon
6%
Saudi
24%
Source: IMS
184
Growth in top nine MENA pharmaceutical market

20%
2011
15%
2012
2013
10%
5%
0%
Source: IMS
Kuwait
Jordan
Tunisia
Lebanon
Morocco
-5%
UAE
Egy pt
22%
Algeria
Algeria
21%
Nevertheless, local manufacturers have been

reducing their exposure to these tenders,
preferring to focus on the still higher margins in
the export markets, which are more prone to
allowing the entrance of plain generics. Although
there is little to suggest that the domestic retail
market will welcome plain generics in the near
term, spend on drugs per capita in Saudi is still
low, at less than a third of OECD levels, which
we believe suggests strong growth potential for
the entire pharmaceutical market going forward.
Egypt
UAE
9%
On the demand side, pharmaceutical drugs for the

public sector in Saudi are procured through the
Secretariat-General of Health (SGH) and the
National Unified Procurement Company for
Medical Supplies (NUPCO). SGH tenders procure
pharmaceuticals for the whole of the GCC and,
generally, the regional drug manufacturers, which
are based in the GCC, get preferential treatment in
these tenders.
Saudi
Morocco
9%
combined with the cost of the sales force, means that

it is difficult to build a business case for launching
generic drugs when the first and second entries have
already been launched.
abc
Equities
Saudi Arabia
July 2014
Astra Industrials Group

ASTRA AB, Price SAR47.90, N, TP:
SAR63
Company description
The company has three main business segments:
pharmaceuticals represented by the Tabuk
Pharmaceutical Manufacturing Co., specialty
chemicals represented by Astra Polymer
Compounding Co & Astra Industrial Complex Co.,
and finally, steel industries represented by the
International Building Systems Factory Co. and Al
Tanmia Steel. All these subsidiaries, excluding Al
Tanmia Steel, are 100% owned by Astra Industrials
through either direct or indirect ownership.
Investment thesis
Through its diversified segments and revenue
streams, we believe Astra is an attractive
collection of companies operating in what we
view as Saudi Arabia's most attractive segments.
The company's different holdings operate in the
healthcare, petrochemical, fertiliser and
infrastructure segments.
Tabuk Pharmaceuticals is the second largest local
pharmaceutical company in Saudi Arabia by market
share. The company also exports to different
regional markets exports accounted for 28% of
revenue in 2013. Tabuk Pharmaceuticals accounted
for over 85% of the group's net income in 2012
although it accounted for only 49% of revenue.
During 2013, Astras pharmaceutical division
reported 32% top-line growth. This was partly due
to a surge in bulk tenders, which are usually sold to
the government. We believe that the strong growth
in the pharmaceutical division will continue in
2014e, however, this year, it will likely be mostly

driven by the new injectables capacity coming
online. Although the Dammam injectables plant,
which was set for a Q1 2014 start, is now postponed
due to a labour shortage, it is expected to add
around 20-25% of capacity, which we expect could
imply strong growth for the division along with the
organic growth we have been seeing over the last
few quarters.
Raj Sinha*
+971 4423 6932
raj.sinha@hsbc.com
However, Astras steel division continues to face

margin pressure. Although we believe that Astras
steel division (especially its operations in Iraq)
present a strong growth opportunity for the
company in the long term, in the medium term, we
continue to see increasing margin pressure on the
division. Over the last few quarters, the division
has been seeing a significant drop in margins, and
during H1 14 management pointed to increasing
costs and lower production in Iraqi steel operations.
The recent tensions in Iraq led to the stoppage of
production of the plant, which put further pressure
on profits.
Financials
During Q2 14, Astra reported net profit of
SAR3m, well below the SAR62m net profit seen
in Q2 13. The main reasons for the significantly
weak results include the write downs and plant
shutdowns in Iraqi steel operations.
185
abc
Equities
Saudi Arabia
July 2014
Valuation
Risks
We value Astra using a DCF methodology. The

WACC of 10.8% is derived from a risk-free rate of
1.8% (SAIBOR rate for 12 months). We assume a
cost of debt of 4% while the market cost of equity is
based on a combination of relative index returns,
CDS spread (for five year sovereign Saudi Arabia
CDS) and inflation differential to arrive at 12.5%.
The long-term beta is Bloombergs adjusted beta for
the stock of 1.09. The DCF valuation yields an
equity fair value of SAR63.
Key downside risks are:
Under the HSBC research model for stocks

without a volatility indicator, the Neutral band is 5
for Saudi Arabia of 9%. At the time we set our
target price it implied a potential return within the
Neutral band, hence we have a Neutral rating on
Astra. Potential return equals the percentage
when indicated.
186
Increased competition in the Saudi generic

pharmaceuticals market.
Reduced demand for products in the chemical
and steel sectors.
Key upside risks are:
The steel smelter in Iraq gets up and running,

which would positively impact profits.
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Astra Industrial Group

Valuation data
Year to
12/2013a
12/2014e
12/2015e
12/2016e

Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
1,772
222
-48
174
-30
211
211
0
253
253
2,005
305
-56
249
-31
278
278
0
311
311
2,233
408
-57
351
-29
382
382
0
382
382
2,346
492
-58
434
-26
468
468
0
468
468

Capex
Dividends
Change in net debt
FCF equity

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Year to
-27
-224
190
-130
-123
-276
265
-201
-201
-156
-160
5
378
-89
-89
-191
-133
229
385
-94
-94
-468
-100
231
46
1,329
2,274
197
3,651
834
936
739
1,881
2,617
46
1,474
2,404
216
3,927
1,095
795
579
2,037
2,613
46
1,507
2,608
349
4,163
1,140
795
446
2,228
2,671
46
1,542
2,851
450
4,441
1,419
795
345
2,228
2,571
(SARm)
12/2013a
12/2014e
12/2015e
12/2016e
2.4
19.3
1.6
14.0
1.9
-7.8
3.7
2.1
13.6
1.6
11.4
1.7
0.1
4.4
1.8
9.8
1.5
9.3
1.6
6.4
5.4
1.7
7.9
1.5
7.6
1.6
6.5
13.2
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price
Neutral
(SAR)47.90
Reuters (Equity)
Market cap (USDm)
Free float (%)
Country
Analyst
Target price
1212.SE
947
39
Saudi Arabia
Raj Sinha

12/2013a
71
66
61
56
51
46
41
36
31
26
2012
2013
2014
71
66
61
56
51
46
41
36
31
26
2015
Source: HSBC
12/2014e
12/2015e
12/2016e
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
Bloomberg (Equity)
ASTRA AB
Market cap (SARm)
3,550
4127
Sector
CONGLOMERATES
Contact
+971 4423 6932
Price relative
Astra Industrial Group
Year to
3
1
.
5
(SAR)63.00
18.4
-1.3
-6.1
-1.1
4.3
13.2
37.1
43.1
31.4
23.0
11.4
33.8
40.9
37.6
22.8
5.0
20.8
23.8
22.5
22.5
0.7
6.5
13.5
6.7
12.5
9.8
7.4
39.3
3.3
0.8
9.5
15.9
8.2
15.2
12.4
9.7
28.4
1.9
45.8
0.8
13.3
17.9
10.2
18.3
15.7
14.1
20.0
1.1
84.7
0.9
16.6
21.0
11.5
21.0
18.5
18.6
15.5
0.7
111.5
3.42
3.42
1.75
25.42
4.20
4.20
2.10
27.52
5.16
5.16
2.58
30.10
6.32
6.32
6.32
30.10
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
187
abc
Equities
Saudi Arabia
July 2014
Dallah Healthcare
DALLAH AB, Price SAR104, OW, TP:
SAR115
Company description
Founded in 1987, Dallah Healthcare owns and
operates a single hospital in north Riyadh while
also offering its management services to other
healthcare providers. The company is also in the
process of building a new 300-bed hospital in
west Riyadh. Furthermore, Dallah has a pharma
division which is responsible for the wholesale of
pharmaceutical, herbal and cosmetic products.
The company also has an operations management
division which currently manages two hospitals
via 5-year contracts, one of the contracts
operational and one strictly management. The
contracts are set to expire in November 2015 and
April 2016, respectively.
Investment thesis
During Q4 2013, Dallah opened its new paediatric
unit. This expansion increases the number of
operational beds by c20%, which should drive
strong top-line growth in the second half of
2014e, by our estimates. The company also plans
to open 65 new clinics by the end of 2014e,
implying more than a 40% increase in the number
of clinics operated, which we expect to lead to
strong growth for 2015e. We estimate Dallahs
hospital division to generate c20% top-line
growth during 2014-15e as new capacity comes
online. During H1 2013, margins dropped
significantly, mainly due to expansion costs.
Administrative costs as a percentage of sales
increased to 21% in H1 2013 compared to 12% in
188
FY12, implying to an 18% operating margin.

However, the company has been able to contain
costs with the admin expenses to sales ratio
coming in at 18.5% for Q1 2014, despite the
opening of the new paediatric block, which should
mature as the year progresses. We expect
operating margins of 18% for 2014e.
On 31 March 2014, Dallah announced that it has
signed a MoU with Dr. Erfan and Badego General
Hospital (not listed) to acquire its 326-bed facility
in Jeddah. We believe this is likely to be a hospital
where Dallah can improve margins, given the low
support staff to doctor ratios and heavy focus on
inpatients, both of which weigh on margins.
The 326-bed hospital, which is one of a select
group of JCI (Joint Commission International)
accredited hospitals in Saudi, saw 1.6k to 1.8k
outpatients and 170-200 inpatients per day during
2013. Since Badegos admission rates are well
ahead of Dallahs (at c10% versus 4%), we believe
that this hospital caters to the mid to high-end
patient category, as generally only government
hospitals focus as much on in-patients (most other
private hospitals focus on outpatients). We assume
the per patient revenue generated by Badego is
30% lower compared to Dallah considering the
location and Dallahs premium reputation, but the
risk is this discount is likely to be too high, in our
view; this leads to our estimate that Badego
generated a net revenue of SAR650m during 2013.
Given the low proportion of support staff to doctors
(4x vs. 7.3x for Dallah) and the high in-patient
admission ratio, we would expect margins to be
much lower than Dallahs. We would expect
Raj Sinha*
+971 4423 6932
raj.sinha@hsbc.com
abc
Equities
Saudi Arabia
July 2014
Dallah, should it be successful in its takeover, to

increase support staff and open more clinics to
drive outpatient volumes, all of which would
require little investment and improve margins, in
our view.
Financials
We estimate Dallah to see more than 18% revenue
growth in 2014e and more than 20% revenue
growth in 2015e due to the new capacity
additions. The group has already added a new
paediatric wing which should start contributing to
the top-line and plans to add 65 new outpatient
clinics by end 2014, which we expect to drive
growth in 2015e.
Risks
The new hospital coming on line in 2016

causing a larger drag than expected on
revenues per patient; we currently estimate
that revenue per patient will be 10% lower
than at the existing hospital.
We expect Saudisation to force the
company to have 50% Saudis in the
workforce by 2016; any acceleration in this
timetable would be a negative, in our view.
Valuation
We value Dallah using a DCF methodology. The
cost of debt of 4% while the market cost of equity is
based on a combination of relative index returns,
CDS spread (for five year sovereign Saudi Arabia
CDS) and inflation differential to arrive at 12.5%.
We use a terminal growth rate of 2.5% and a beta of
0.90 (based on historical Bloomberg beta).. This
yields a target price of SAR115.
return above the Neutral band. Hence we have an
Overweight rating for Dallah. Potential return
189
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Dallah Healthcare

Valuation data
Year to
12/2013a
12/2014e
12/2015e
12/2016e

Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
750
176
-39
137
0
148
148
-11
137
137
886
212
-48
164
-3
171
171
-13
158
158
1,078
263
-57
206
-5
211
211
-16
195
195
1,215
288
-56
231
-5
236
236
-18
218
218

Capex
Dividends
Change in net debt
FCF equity

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Year to
170
-421
-628
-71
526
-256
170
-152
-152
-71
59
45
204
-228
-228
-71
105
15
245
-36
-36
-71
-125
228
0
821
500
150
1,479
108
121
-29
1,190
1,063
0
920
493
91
1,571
118
121
30
1,272
1,204
0
1,090
491
15
1,740
133
150
135
1,396
1,433
0
1,070
671
140
1,900
146
150
10
1,543
1,455
(SARm)
12/2013a
12/2014e
12/2015e
12/2016e
6.3
27.0
4.5
35.9
4.1
-5.4
1.4
5.4
22.7
4.0
31.0
3.9
0.9
1.4
4.6
18.7
3.4
25.1
3.5
0.3
1.4
3.9
16.7
3.3
22.5
3.2
4.8
1.4
Target price
(SAR)115.00
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price
Overweight
(SAR)104.00
Reuters (Equity)
Market cap (USDm)
Free float (%)
Country
Analyst
4004.SE
1,309
43
Saudi Arabia
Raj Sinha
115
115
105
105
95
95
85
85
75
75
65
65
55
55
45
2012
2013
Dallah Healthcare
12/2013a
Source: HSBC
12/2014e
12/2015e
12/2016e
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
17.8
10.1
4.7
9.3
2.7
18.2
20.6
19.7
16.1
15.9
21.7
24.1
25.7
23.2
23.3
12.6
9.1
12.2
11.6
11.6
0.9
15.3
11.9
10.0
23.5
18.3
512.7
-2.4
-0.2
0.8
13.4
12.9
10.5
24.0
18.5
84.3
2.4
0.1
569.5
0.8
14.5
14.6
12.1
24.4
19.1
54.4
9.7
0.5
151.4
0.8
14.8
14.8
12.3
23.7
19.0
53.0
0.6
0.0
2450.0
2.90
2.90
1.50
25.21
3.36
3.36
1.50
26.94
4.14
4.14
1.50
29.58
4.62
4.62
1.50
32.70
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
190
Bloomberg (Equity)
DALLAH AB
Market cap (SARm)
4,909
4810
Sector
HEALTH CARE PROVIDERS
Contact
+971 4423 6932
Price relative

Year to
1
0
.
6
2014
45
2015
abc
Equities
Saudi Arabia
July 2014
Al Mouwasat Medical
Services Co
MOUWASAT AB, Price SAR108.25,
OW, TP: SAR126
Company description
Mouwasat is one of the largest hospital operators in
Saudi Arabia, currently operating four hospitals with
594 beds and 231 outpatient clinics. The group
currently does not have a presence in Riyadh but has
a strong presence in Eastern cities. Mouwasat has a
strong corporate client base with companies like
Saudi Aramco, Saudi Electricity Company and
SABIC utilizing its services.
Investment thesis
Our Overweight rating on Mouwasat is based on
the following:
We see strong growth potential in the Saudi
private healthcare sector due to factors
ranging from an ageing population to an
increasing number of people with insurance
coverage. Mouwasat is one of the largest
players in the sector and should benefit from
this, in our view
Mouwasat has a very strong expansion plan,
which could see the group more than double
its inpatient bed capacity by 2018e and
expand its outpatient clinics by more than
50% by 2018e
Mouwasat has been able to generate strong
organic growth from an increasing number of
patients as well as improving tariffs/case mix.
We see this trend continuing and
complementing the groups expansion plans
We expect improving margins in the medium

term from the improving mix as the
contribution of the low-margin
pharmaceutical division drops as a percentage
of total sales and from improving gross
margins in hospitals. However, following the
probable opening of a new Riyadh hospital in
Q3 2014, there could be slight margin
pressure in the short term
Raj Sinha*
+971 4423 6932
raj.sinha@hsbc.com
Financials
During 2013, Mouwasat saw a slowdown in terms
of top-line growth as revenue grew by 13%
(slower compared to the 16% average growth seen
between 2010 and 2012). One of the main reasons
was the significant drop in outpatient revenue
growth (11% growth in 2013 vs. three-year
average growth of 23%). Although the company
has not pointed to any particular factors, we
believe the general slowdown in Q3 following the
crackdown on illegal labourers was likely one of
the reasons. Furthermore, over the last five years
the group has not added any new beds, implying
that all the growth we are seeing is purely organic.
We believe 2014/15e should see strong revenue
growth due to the improving claim per patient as
well as the opening of a new hospital in Riyadh.
We estimate 12% revenue growth in 2014e and
20% in 2015e as the new hospital matures.
191
abc
Equities
Saudi Arabia
July 2014
Over the last few quarters Mouwasat has seen

a strong improvement in margins. We believe
the improvement at the gross margin level is
due to two factors:
Improving mix as the contribution of the
low margin pharmaceutical division
dropped as a percentage of total sales
Improving gross margins in hospitals
We believe the opening of the new hospital could
put some pressure on margins initially, however,
we see the decrease in the contribution of
pharmaceuticals to total sales continuing. This and
strong margins in the hospital division should help
the company post operating margins of 24% in the
medium term, on our estimates.
Valuation
We value Mouwasat using a DCF methodology.
The WACC of 9.2% is derived from a risk-free
rate of 1.8% (SAIBOR rate for 12 months). We
assume a cost of debt of 4%, while the market
cost of equity is based on a combination of
relative index returns, CDS spread (for five year
sovereign Saudi Arabia CDS) and inflation
differential to arrive at 12.5%. The long-term beta
is Bloombergs adjusted beta for the stock of 0.90.
The DCF valuation yields our target price of
SAR126 per share.
Under the HSBC research model for stocks without
a volatility indicator, the Neutral band is 5ppt above
and below the hurdle rate for Saudi Arabia of 9%.
Our target price of SAR126 implies a 16% potential
return, above the Neutral band, hence we reiterate
our Overweight rating. Potential return equals the
192
Risks
20% of the companys revenue comes from

the ARAMCO contract, which is up for
renewal in mid-2015. ARAMCOs new JV
with JHI might negatively affect the
profitability of this contract
Further incentives offered to large insurance
customers could put pressure on margins
Any further regulation to increase Saudisation
levels past the 50% threshold that we forecast
would be a negative, in our view
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Al Mouwasat Medical Services Co

Valuation data
Year to
12/2013a
12/2014e
12/2015e
12/2016e

Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
902
263
-40
222
-1
232
232
-14
201
201
1,014
289
-49
240
-8
241
241
-12
209
209
1,218
386
-80
306
-9
306
306
-15
267
267
1,417
445
-85
360
-9
361
361
-18
315
315

Capex
Dividends
Change in net debt
FCF equity

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Year to
275
-221
-218
-75
60
36
260
-180
-180
-126
46
71
336
-150
-150
-160
-25
177
393
-142
-142
-189
-62
243
17
868
481
180
1,475
149
342
161
889
1,037
17
1,000
473
135
1,597
169
342
207
972
1,186
17
1,069
565
160
1,759
200
342
182
1,079
1,292
17
1,126
693
222
1,943
231
342
119
1,205
1,383
(SARm)
12/2013a
12/2014e
12/2015e
12/2016e
6.2
21.2
5.4
26.9
6.1
0.7
2.2
5.5
19.4
4.7
25.9
5.6
1.3
2.3
4.6
14.5
4.3
20.2
5.0
3.3
3.0
3.9
12.4
4.0
17.2
4.5
4.5
3.5
Target price
(SAR)126.00
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price
Overweight
(SAR)108.25
Reuters (Equity)
Market cap (USDm)
Free float (%)
Country
Analyst
4002.SE
1,443
44
Saudi Arabia
Raj Sinha

12/2013a
122
112
102
92
82
72
62
52
42
32
2012
2013
2014
122
112
102
92
82
72
62
52
42
32
2015
Source: HSBC
12/2014e
12/2015e
12/2016e
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
Bloomberg (Equity)
MOUWASAT AB
Market cap (SARm)
5,413
5612
Sector
Contact
+971 4423 6932
Price relative
Al Mouwasat Medical Servi
Year to
1
6
.
4
13.3
17.0
19.8
20.1
17.3
12.3
10.0
8.0
3.7
4.0
20.2
33.7
27.4
27.1
27.8
16.3
15.2
17.8
17.8
17.9
0.9
22.0
24.4
16.3
29.1
24.6
187.7
17.0
0.6
170.3
0.9
20.5
22.5
15.4
28.5
23.7
35.6
19.7
0.7
125.5
1.0
23.4
26.1
17.8
31.7
25.1
45.2
15.4
0.5
184.6
1.1
25.6
27.6
19.0
31.4
25.4
52.1
8.9
0.3
329.4
4.02
4.02
2.41
17.77
4.19
4.19
2.51
19.44
5.35
5.35
3.21
21.58
6.30
6.30
3.78
24.10
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
193
abc
Equities
Saudi Arabia
July 2014
National Medical Care Co

(NMCC)
CARE AB, Price SAR73.50, N, TP
SAR78
Company description
National Medical Care Co (NMCC) was
established in 2003 as a joint-stock company. The
purpose of the company was to transfer the
ownership of 20% of both Al Riyadh Care and
The National Hospital to a group of investors by
the General Organization for Social Insurance
(GOSI). Before that, both hospitals were fully
owned by the GOSI.
NMCC operates the aforementioned two hospitals
in Riyadh, with a combined bed capacity of c600
beds and c90 clinics. In 2009, the Al Riyadh Care
hospital gained JCI accreditation.
Investment thesis
NMCCs hospitals were originally under
government control, which explains two things: that
both its hospitals are located in the southeast of
Riyadh, which is the older and perhaps less affluent
part of the city; and that its staff costs are higher than
those of the other two groups.
NMCC had strong revenue growth in the last few
quarters. However, in terms of margins we are
seeing slight pressure. We expect strong revenue
growth of 22% in 2014e due to the recent new
openings. NMCC added 208 inpatient beds
(paediatric beds and adult intensive care units)
during April 2014 along with 24 outpatient clinics.
We believe these additions will likely lead to strong
194
growth. Furthermore, the company plans to

renovate 96 inpatient beds and 46 outpatient clinics
in coming quarters, which could lead to strong
traffic in the longer term.
Financials
NMCC reported strong revenue growth during Q2
14, thanks to the new opening. The groups
operating profits grew by 39% while net income
grew by 40% during the quarter. For H1 14,
operating profit growth was a strong 16%. For the
full year 2014e we estimate more than 20%
revenue growth.
Valuation
We value NMCC using DCF methodology. The
cost of debt of 4%, and the market cost of equity
is based on a combination of relative index
returns, CDS spread (for five year sovereign
Saudi Arabia CDS) and inflation differential to
arrive at 12.5%. We use a terminal growth rate of
2.5% and a beta of 0.90 (based on historical beta
from Bloomberg). Our DCF model generates a
target price of SAR78.
within the Neutral band; therefore, we are reiterating
our Neutral rating for NMCC. Potential return equals
Raj Sinha*
+971 4423 6932
raj.sinha@hsbc.com
Equities
Saudi Arabia
July 2014
abc

Risks
Key upside risks:
That the company is able to bring staff costs

down aggressively by hiring more support staff
That the new clinics, which have lower
overhead, lead to a more aggressive increase
in margins than anticipated
Key downside risks:
We expect Saudisation to force the

company to have 50% Saudis in the
workforce by 2016; any acceleration of this
timetable would be a negative, in our view
The high prices may be negotiated downward
by insurance companies
195
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: National Medical Care Co

Valuation data
Year to
12/2013a
12/2014e
12/2015e
12/2016e

Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
586
123
-31
92
0
100
100
-7
92
92
716
147
-32
115
0
123
123
-9
114
114
783
173
-41
132
0
140
140
-10
130
130
874
199
-43
156
0
164
164
-11
153
153

Capex
Dividends
Change in net debt
FCF equity

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Year to
79
-130
-130
-65
-58
-74
111
-150
-150
-80
119
-47
150
-110
-110
-91
52
32
166
-70
-70
-107
11
88
0
558
512
186
1,071
171
87
-99
812
714
0
676
445
67
1,121
187
87
20
847
867
0
745
452
45
1,197
194
117
72
886
958
0
772
511
64
1,283
204
147
83
932
1,014
(SARm)
12/2013a
12/2014e
12/2015e
12/2016e
5.5
26.0
4.5
35.6
4.1
-2.2
2.0
4.6
22.5
3.8
28.8
3.9
-1.4
2.4
4.3
19.5
3.5
25.3
3.7
1.0
2.8
3.9
17.0
3.3
21.6
3.5
2.7
3.2
Target price
(SAR)78.00
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price
Neutral
(SAR)73.50
Reuters (Equity)
Market cap (USDm)
Free float (%)
Country
Analyst
4005.SE
879
30
Saudi Arabia
Raj Sinha

12/2013a
133
123
113
103
93
83
73
63
53
43
33
2012
2013
Source: HSBC
12/2014e
12/2015e
12/2016e
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
11.7
-7.2
-12.4
-10.6
-12.3
22.1
19.8
25.8
23.6
23.7
9.3
17.4
14.6
13.6
13.9
11.7
14.9
17.9
16.9
17.3
0.9
13.3
13.0
9.9
21.0
15.6
0.9
13.5
13.8
10.4
20.6
16.1
0.9
13.5
15.1
11.3
22.1
16.9
0.9
14.7
16.8
12.3
22.7
17.8
-12.2
-0.8
2.4
0.1
544.9
8.1
0.4
208.1
8.9
0.4
201.3
2.06
2.06
1.45
18.11
2.55
2.55
1.79
18.87
2.91
2.91
2.04
19.75
3.41
3.41
2.39
20.77
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
196
Bloomberg (Equity)
CARE AB
Market cap (SARm)
3,296
3317
Sector
Contact
+971 4423 6932
Price relative
National Medical Care Co
Year to
6
.
1
2014
133
123
113
103
93
83
73
63
53
43
33
2015
abc
Equities
Saudi Arabia
July 2014
Saudi Pharmaceuticals
(SPIMACO)
SPIMACO AB, Price SAR47.80, N,
TP SAR47.08
Company description
Saudi Pharmaceutical (SPIMACO) is the leading
Saudi pharmaceutical company. It is involved in
the development, manufacture, distribution and
marketing of its own products as well as licensed
products of other international manufacturers.
The company was established in 1986 but only
began operations in 1990 with 6 products. In
2000, the company began operations in Algeria.
An important and distinctive advantage of
SPIMACO's strategy is its relationships with
multinational companies. Most of SPIMACO's
earlier deals were structured so that SPIMACO
manufactures products for multinationals. In
addition, SPIMACO would undertake the sales
and marketing, which meant dealing with the
Ministry of Health (MOH) and other government
institutions. SPIMACO actively markets most of
its registered products to all the various segments
in the market: MOH, private institutions and the
export market.
Today, the company has over 150 products,
controls around 14% of the Saudi pharmaceuticals
market and has three of the top ten selling
products by value.
Investment thesis
SPIMACO has been seeing robust gross margin
improvements over the last few quarters. We
believe this is a result of the companys continued
expansion into higher-margin export and private
sales at the expense of government sales which

carry lower margins. SPIMACOs management
has said it will continue with this strategy and sees
opportunities in countries like Turkey, which they
can access through their 7-year marketing
agreement with Abdi Ibrahim signed in August
2013. However we are seeing increasing SG&A
expenses for the group over the last few quarters.
Management have said that the increasing S,G&A
had little to do with the recent crackdown on
illegal labour in the Kingdom, rather it was the
result of investment in therapeutic categories that
are new to them such as high blood pressure,
diabetes and digestive system disorders. We
estimate margins to remain weak in 2014 and
believe that things should improve in 2015.
However the stock is up by more than 35% over
the last 12 month period which in our opinion
prices in the potential growth.
Raj Sinha*
+971 4423 6932
raj.sinha@hsbc.com
Valuation
We value SPIMACOs core pharmaceutical
business using a DCF methodology with a WACC
of 10.9% derived from a risk-free rate of 1.8%
representing the 12-month SAIBOR rate, a cost of
debt derived from adding 220bps to the risk-free
rate, and a market cost of equity of 12.7% derived
from a combination of relative index returns, CDS
spread and inflation differential. The long-term
beta of 0.99 is derived from Bloombergs adjusted
beta and the debt/equity ratio is assumed to be
30:70. We value the investment holdings at book
value, which is below market valuation. This
yields an equity fair value of SAR47.08 per share.
197
Equities
Saudi Arabia
July 2014
Under the HSBC research model for stocks

without a volatility indicator, the Neutral band is 5
of Saudi Arabia of 9%. At the time we set our
target price it implied a potential return within the
Neutral band hence we have Neutral rating
SPIMACO. Potential return equals the percentage
when indicated.
Risks
Increased competition in the generic

pharmaceuticals market.
An inability to gain first entrant registration
for off-patent drugs would reduce margins for
the company.
Ramp up in SG&A leads to much better sales

than expected
Company decides to divest its non-core assets
and distribute the proceeds to shareholders.
198
abc
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Saudi Pharmaceutical

Valuation data
Year to
12/2013a
12/2014e
12/2015e
12/2016e

Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
1,297
239
-28
211
-2
289
289
0
270
270
1,394
260
-29
231
0
346
346
0
324
324
1,501
301
-31
270
0
403
403
0
379
379
1,600
306
-34
272
0
400
400
0
375
375

Capex
Dividends
Change in net debt
FCF equity

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Year to
163
-46
-59
-187
47
9
291
-56
-63
-243
-113
142
342
-60
-60
-303
-63
173
346
-64
-64
-338
-3
178
3
376
1,326
119
4,368
426
20
-99
3,758
1,160
6
407
1,524
232
4,601
449
20
-212
3,839
1,257
5
438
1,679
295
4,785
473
20
-275
3,915
1,354
5
469
1,769
298
4,906
497
20
-278
3,952
1,447
(SARm)
12/2013a
12/2014e
12/2015e
12/2016e
2.3
12.4
2.6
21.2
1.5
0.3
3.3
2.1
11.0
2.3
17.7
1.5
4.6
4.2
1.9
9.3
2.1
15.1
1.5
5.6
5.3
1.7
9.1
1.9
15.3
1.5
5.8
5.9
Target price
(SAR)47.08
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price
Neutral
(SAR)47.80
Reuters (Equity)
Market cap (USDm)
Country
Analyst
2070.SE
1,529
Saudi Arabia
Raj Sinha
Bloomberg (Equity)
SPIMACO AB
Market cap (SARm)
5,736
Sector
Contact
+971 4423 6932
Price relative
55
55
50
50
45
45
40
40
35
35
30
30
25
25
20
2012
2013
Saudi Pharmaceutical
2014
20
2015
Source: HSBC

Year to
5
0
.
6
12/2013a
12/2014e
12/2015e
12/2016e
9.6
3.5
5.4
15.0
16.0
7.5
8.8
9.6
19.7
20.0
7.7
15.7
16.7
16.4
17.0
6.6
1.5
0.7
-0.6
-1.1
1.2
19.8
8.0
7.3
18.4
16.3
119.5
-2.6
-0.4
1.2
19.3
8.5
7.7
18.7
16.6
1.2
20.8
9.8
8.6
20.1
18.0
1.1
19.5
9.5
8.3
19.1
17.0
-5.5
-0.8
-6.9
-0.9
-6.9
-0.9
2.25
2.25
2.38
31.33
2.70
2.70
3.10
32.00
3.16
3.16
3.87
32.63
3.13
3.13
4.30
32.95
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
199
abc
Equities
Saudi Arabia
July 2014
Al Hammadi Dev. &

Investment Co.
ALHAMMAD AB, Not Rated
Company description
Al Hammadi Development & Investment Co. (Al
Hammadi) owns and operates Al Hammadi
Hospital in the Olaya district of Riyadh.
Established in 1985, the hospital has a capacity of
200 beds, with 74 outpatient clinics, employing
196 doctors and 400 nurses.
Al Hammadi announced plans to open two new
hospitals in Riyadh in Q3 of 2014 and early 2015.
The two hospitals are to be opened in the
southwest and northeast areas of Riyadh, with a
planned capacity of 428 beds each, bringing the
total capacity of the group to 1,156 beds. The
company also plans to add 128 new outpatient
clinics (64 each in both the new hospitals), which
would take the total number of clinics to 202.
The company listed on the Saudi market on 15
June, 2014, after raising SAR630m in its IPO.
75% of the proceeds are targeted for capital
investments.
Financials
During 2013, Al Hammadi reported 14.6%
revenue growth due to strong growth in both
inpatient and outpatient revenues. Although the
number of inpatients in Al Hammadi hospital
dropped by 5% during the year, the sharp increase
in claim per patient helped boost revenue growth.
In terms of operating margins the group reported a
1.4pp improvement as general & administrative
expenses as a percentage of sales saw a significant
drop during the year.
200
Recent news
On 20 July, 2014, Al Hammadi reported Q2 14
results. During the quarter the group saw 18%
net income growth along with 24.5% operating
income growth. For the first half of 2014, the
group reported 16.6% net income growth along
with 22% operating income growth.
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Al Hammadi
Not Rated
Valuation data
Year to
12/2010a
12/2011a
12/2012a
12/2013a

Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
302
102
-14
88
-5
84
84
-4
80
80
331
105
-13
92
-2
92
92
-2
90
90
379
106
-14
92
-2
97
97
-3
94
94
434
126
-14
112
0
116
116
-4
112
112

Capex
Dividends
Change in net debt
FCF equity

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
102
0
0
-12
-99
92
105
0
0
-27
26
102
106
0
0
0
144
102
126
0
0
-95
389
121
0
317
174
21
491
37
0
-21
444
433
0
398
166
35
564
46
40
5
474
483
0
650
193
63
843
59
213
149
569
721
0
1,028
209
42
1,236
67
580
538
586
1,127
(SARm)
12/2010a
12/2011a
12/2012a
12/2013a
12.2
36.1
8.5
46.2
8.3
2.5
0.3
11.2
35.2
7.6
41.0
7.8
2.8
0.7
10.1
36.2
5.3
39.1
6.5
2.8
0.0
9.7
33.6
3.8
33.1
6.3
3.3
2.6
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price
Year to
(SAR)49.20
Reuters (Equity)
Market cap (USDm)
Country
Analyst
Target price
4007.SE
984
Saudi Arabia
Not Rated
Bloomberg (Equity)
ALHAMMAD AB
Market cap (SARm)
3,690
Sector
Contact
Not Rated
Price relative
51
51
46
46
41
41
36
36
31
2012
2013
Al Hammadi
2014
31
2015
Source: HSBC

Year to
1
.
6
(SAR)Not Rated
12/2010a
12/2011a
12/2012a
12/2013a
-2.7
3.3
8.6
1.9
4.5
9.7
3.4
4.9
9.5
12.6
14.5
0.8
0.2
5.3
4.8
14.6
18.7
21.4
19.6
18.3
0.7
18.7
19.4
15.6
33.7
29.1
19.0
-4.7
-0.2
0.7
19.7
19.6
17.0
31.8
27.9
65.2
1.0
0.0
2173.3
0.6
14.9
18.1
13.4
28.0
24.4
63.9
26.2
1.4
71.0
0.5
11.7
19.3
10.7
29.0
25.8
393.0
91.8
4.3
23.4
1.06
1.06
0.16
5.93
1.20
1.20
0.36
6.32
1.26
1.26
0.00
7.58
1.49
1.49
1.26
7.81
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
201
abc
Equities
Saudi Arabia
July 2014
202
Equities
Saudi Arabia
July 2014
abc
Real Estate
203
abc
Equities
Saudi Arabia
July 2014
Real Estate
Saudi Government still driving the market
Long term fundamentals are still there, but how to play it?
Saudi real estate

Saudi Arabia is a strong residential real estate
market: the country has a significant shortage of
housing, a very young population (c60% under
the age of 25), and strong GDP growth, about
4.2% in 2014e, according to our economists. The
government plans to build 500,000 new homes
and issue more than 60,000 loans a year on very
attractive terms, which should also support the
market. It is also working on market reforms
which could act as a positive catalyst to develop
the sector as a whole.
Residential
The residential market in both Riyadh and Jeddah
is very undersupplied. We estimate that the
government needs to build 1m homes over the
next five years in order to meet demand.
Residential supply in Riyadh and Jeddah (in thousands of
units)
1,100
1,000
900
800
700
Riyadh
Completed
Source: JLL
204
Jeddah
Additions
2016
2015
2014
2013
2012
2016
2015
2014
2013
2012
600
With minimal supply additions planned in the

next 3 years, prices will keep increasing if the
government, or developers, do not launch new
projects. As of the end of 1Q2014, Riyadhs
current residential stock stands at 944,000 units
according to Jones Lang LaSalle (JLL). There are
93,000 additional units that will be added through
2016, or a 9.6% increase from 1Q2014 levels. Of
the total future supply, less than 9.9% of
residential units are expected to be expat
compounds over the next 5 years.
Jeddah has 754,000 units with 73,000 units being
added through 2016, for a 9.7% increase. New
affordable housing stock that will be built by
JDURC, PPA and the Ministry of Housing may
increase this figure.
Over the past 6 months in Riyadh, the residential
market has experienced an overall upward trend,
with sales prices for apartments increasing 7%
during the period as of the end of 1Q2014. JLL
expects villa prices to also increase after
increasing 2.6% during the same period.
Residential rental yields remain high, at c7-9%,
making it a very attractive segment.

Analyst
HSBC Saudi Arabia
+ 966 1 299 2100
abc
Equities
Saudi Arabia
July 2014
Office
The office market in Jeddah witnessed strong
demand in 2013, mostly driven by government
spending. We are also seeing more demand from
the private sector with international firms
expanding their business across Jeddah. Vacancy
for the overall market stood at 10% as of 1Q2014,
down from 30% levels in 2011. It is expected to
fall further in the short term, with no significant
new supply coming on. Office stock in the CBD
area is now 723,000sqm. As of the end of
1Q2014, supply is expected to increase 35%
through 2016 which we think will be absorbed.
Riyadh
Completed
2016
2015
2014
2013
Jeddah is a similar story, with a positive trend in

the residential market and overall sales prices
increasing slightly for both villas and apartments.
Rents have not done as well over the past 6
months with villa rents down 1.7% and apartment
rents down 1.4% during the period. West Jeddah,
which is already at a 30% premium to the rest of
the city, saw increases in rents mainly because of
high demand due to its proximity to the sea. The
main reason for the decline in rents is the addition
of 15,000 units to the market in the past 6 months
but they should recover going forward.
2012
Source: JLL
2016
2,700
4,419
Apartments
32,900
37,133
2015
4,383
4,700
Villa
121,700
121,000
2014
Apartments
2013
Riyadh
Jeddah
Rentals (SAR per annum)
Riyadh
Jeddah
Villa
2012
Sale (SAR/sqm)
Office Supply Riyadh and Jeddah (in GLA '000 sqm)

4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
Jeddah
Additions
Source: JLL, HSBCe
Riyadh is a different story, however, with vacancy

rates city-wide standing at 19%. There will be
further upward pressure on vacancy rates over the
next 12 months given the expected new supply
entering the market. As at the end of 1Q2014,
office space in Riyadh stood at 2.16m sqm. This is
expected to increase by 1.54m sqm by the end of
2016. A big contributor to this increase will be the
King Abdullah Financial District and the IT and
Communications Complex (ITCC).
Office vacancy rates
40
35
30
25
20
15
10
5
0
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
Riyadh and Jeddah sales and rental prices
Jeddah
Riyadh
Source: JLL, HSBC estimates
Retail
The retail market in Jeddah is doing well. Average
mall vacancy is around 7% and has fallen over the
past 6 months (as of the end of 1Q2014)
according to JLL. We do not expect any supply
shocks going forward and supply should be spread
out across the city, we do not expect this figure to
change much. According to JLL supply is
205
abc
Equities
Saudi Arabia
July 2014
1Q2014
4Q2013
3Q2013
2Q2013
4Q2012
3Q2012
1Q2014
4Q2013
3Q2013
2Q2013
1Q2013
1Q2013
Jeddah
Source: JLL, HSBCe
2016
2015
2014
2013
Hospitality
Jeddah
Additions
Source: JLL, HSBCe
Riyadhs retail space stands at around 1.28m sqm

as of the end of 1Q2014, with supply expected to
increase by 39% through 2016e as per JLL.
Average mall vacancy in Riyadh is around 12%
but it varies quite a lot between the different
major malls, ranging between 0-30%. We expect
vacancies around the city to remain at those
levels, with some newer and higher quality malls
outperforming the older ones. Average Rental
Performance has increased 4.1% over the past 6
months as of 1Q14 across all categories (sizes of
malls) with average rents for super regional malls
at around SAR2,700/sqm p.a. Although there is
some downward pressure on rentals coming from
poorer quality malls, demand is strong as retailers
expand their portfolios.
206
4Q2012
Riyadh
2012
2016
2015
2014
2013
2012
Riyadh and Jeddah retail supply

2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
Riyadh
Completed
Saudi retail rents (SAR/sqm pa)

2,800
2,700
2,600
2,500
2,400
2,300
2,200
2,100
2,000
3Q2012
expected to increase by 23% through 2016e which

we expect will all be absorbed as GLA/capita is
still one of the lowest in the region. Average
Rental Value is expected to remain stable at
around SAR2,636/sqm p.a., but we could see
some rents dropping a little in the older malls as
newer supply comes online.
Saudi Arabia is expecting enormous growth in its

hospitality sector as it is an important job creator
employing 751,000 people as at the end of 2013
(with around 27% of the positions being held by
Saudis). The aim is to increase the number to 1.7
million jobs by 2020 by further developing the
tourism sector, according to the Saudi
Commission for Tourism and Antiquities.
Riyadh hotel supply will likely outpace demand
growth in 2014 and 2015 as arrivals fail to keep
pace with the significant supply coming online.
The next two years alone will see a 73% increase
in hotel supply as of the end of 1Q2014. Even
though the market is showing signs of
improvement, with occupancy at 67% in 3M2014
compared to 63% in 3M2013, we expect
occupancy to decline again in 2014 as more
rooms come online.
abc
Equities
Saudi Arabia
July 2014
Pilgrims in millions (LH)
2013
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
-50%
2012
Jeddah has underperformed over the past 3 years

(ending 1Q2014) with occupancy declining to
76% in 3M2014 compared to 78% in 3M2013 and
3M2012. This is mainly due to a drop in religious
tourism (see chart below) due to the Middle East
Respiratory Syndrome (MERS). This is a very
good performance and points to the resilience of
the Jeddah hotel market and better than when it
averaged in the high 60s. Jeddah remains one of
the best performing hotel markets in MENA.
According to JLL supply is expected to increase
by 50% by the end of 2017, but we believe this
will be absorbed as it is well spread over the next
four years with no sudden supply shocks.
Hajj foreign pilgrims - Saudi

2.0
1.9
1.8
1.7
1.6
1.5
1.4
1.3
1.2
1.1
1.0
2011
Source: JLL, HSBCe
2010
2017
Jeddah
Additions
2009
Completed
2008
Riyadh
2016
2015
2014
2017
2016
2015
2014
2007
5,000
2006
10,000
2005
15,000
2004
20,000
Religious tourism still has a lot of room for

growth. 2013 was a tough year as only 1.37m
foreign pilgrims were able to perform Hajj. This
was down 21.3% YoY with the expansion of the
Holy Mosque given as the main reason for the
reduction in the number of Haj visas granted,
though there also may also have been fears over
the MERS-Coronavirus and its potential to spread
throughout the Kingdom.
2003
Saudi hotel supply (in rooms)

25,000
YoY % change (RH)
Source: Saudi Embassy, Newswires
Hotel occupancy Jeddah and Riyadh YT-March 2014

350
100%
300
80%
250
200
60%
150
40%
100
20%
50
0
0%
2008 2009 2010 2011 2012 2013 2014
Jeddah ADR (USD)
Riy adh Occupancy (%)
Riy adh ADR (USD)

Jeddah Occupancy (%)
Source: JLL, STR Glboal
207
abc
Equities
Saudi Arabia
July 2014
Dar Al Arkan
ALARKAN AB, Price SAR13.6,
Neutral, TP SAR14.0
Company description
Dar Al Arkan (DAAR) is one of the largest
property developers in Saudi Arabia and is based
in Riyadh. The company also has operations in
Jeddah and Makkah. DAAR is a developer,
although it derives most of its revenues ( more
than 90%) from land sales, with the rest coming
from the sale of residential units and rental
income. The company would like over time, to
derive more of its revenue from unit sales. Within
its property portfolio, its key focus is residential,
particularly villas.
Investment thesis
Our investment thesis for Dar Al Arkan is based
primarily on valuation and also we believe that
2013 has been the slowest period in terms of land
sales, a situation which should improve in
2H2014. Additionally, the balance sheet is very
strong, with net debt to equity of 22.7% as of the
end of 1Q14 and no major loan or bond
repayments in 2014.
The company has a book value per share of
SAR16.0. This is a very conservative valuation, in
our view, since all of its land is recorded at cost.
The average life of the land bank is around 3-4
years, and we estimate that we have seen around a
25% increase in land prices over the last 3 years
(implying something like a high-single digit
increase in the value of DAARs land). Given
this, we believe that, even with slow monetisation
208
of its land bank assets, the stock should trade

closer to its book value.
We are now waiting for construction to start on
Shams Arriyadh, a development that has been in the
pipeline for some time. The company has decided
not to pay a dividend, and we believe that some of
the cash retained will go towards the development of
Shams Arriyadh. We expect construction to start this
year (with sales next year). The company will likely
develop a small number of units, in order to increase
the appeal of the remaining land plots, which it will
then likely sell to sub-developers or retail buyers.
Next year, we expect construction on Shams
Al-Arous to start, but we believe that there is much
less to do there, since the land already has
infrastructure in place.
Financials
Dar Al Arkan reported 2Q2014 earnings of
SAR121.3m, lower than our SAR236m estimate,
but 17% higher YoY (although 2Q2013 was a
weak quarter). Net profit was 48% lower QoQ on
the back of lower sales of developed properties, as
well as an increase in SG&A and finance charges
according to the company. Gross profit for
2Q2014 of SAR294.2m, was 14.7% lower than
our SAR345m estimate, and down 27% QoQ, on
the back of lower sales and lower gross margins
attributable to the geographical location of the
properties sold according to the company. Gross
profit in 2Q2014 was 41% higher YoY but this is
from a lower base as 2Q2013 was a weak quarter.
Operational profit was also lower than expected at
SAR224.4m for the quarter, up 29.2% YoY but
down 34% QoQ. We don't have revenue figures

Analyst
HSBC Saudi Arabia
+966 1 299 2100
abc
Equities
Saudi Arabia
July 2014
yet, so we do not know how strong land sales

were, but it appears likely that they were lower
than our SAR833m estimate for the quarter which
we expected to be flat QoQ. Overall, these appear
to us to be weak numbers, but we still need to see
full financials when they are released.
Valuation
We derive our target price for DAAR of SAR14.0
using a SOTP methodology. We value the
companys rental stream, land/residential sales
and Shams Al- Arous/Shams Arriyadh using a
DCF methodology, which leads to a value of
SAR6.2 per share.
We estimate a cost of equity of 12.5%, based on a
risk-free rate of 3.0%, a country risk premium of
6%, and an inflation differential of 3.5%. With a
6% cost of debt, this results in a WACC of 10.5%.
We assume a 3% terminal growth rate for the
rental properties. We then add the SAR10.9 per
share for the residual land we calculate this
using a SAR607 price per sqm and then discount
it by 40% to account for timing. We then subtract
SAR3.1 from the enterprise value for net debt to
arrive at the SAR14.0 per share valuation.
Risks
Downside risks to our rating include:
Slower-than-expected sales at Sham

Arriyadh and Shams Al-Arous because of
delays at the projects could result in the share
price falling.
Lower occupancy rates may hurt rental

revenues and share performance
Slower land sales than we estimate, which
would make it difficult for DAAR to invest in
project development and reinvest in its
land bank.
Upside risks to our rating include:
A faster build out could boost the shares more
than we expect.
If occupancy rates and rents are higher than
we expect, the shares could perform better.
Also, if the company is more quickly able to
move its business model towards owning and
renting units.

of 9.0%, or 4% to 14% potential return from the
current price. At the time we set our target price,
it implied a potential return within the Neutral
band; therefore we have a Neutral rating on the
stock. Potential return equals the percentage
when indicated.
209
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Dar Al Arkan
Neutral
Valuation data
Year to
12/2013a
12/2014e
12/2015e
12/2016e

Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
2,931
1,002
-32
970
-314
699
699
-18
681
681
3,339
1,275
-33
1,242
-271
971
971
-24
946
946
4,037
1,499
-35
1,463
-267
1,196
1,196
-30
1,166
1,166
4,600
1,659
-37
1,622
-196
1,426
1,426
-36
1,390
1,390

Capex
FCF enterprise
Dividends
Change in net debt
FCF equity
Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
959
-1
1,274
-751
0
-224
960
1,232
-17
1,484
-941
0
-291
1,212
1,036
-19
1,282
-423
-540
-73
1,015
1,346
-20
1,520
-28
-1,080
-238
1,324
19,258
5,043
2,470
25,049
5,804
3,334
17,939
20,526
19,646
3,661
855
24,054
4,116
3,261
18,566
21,079
19,636
4,035
1,093
24,419
4,116
3,023
18,876
21,151
(SARm)
18,350
5,099
2,279
24,197
5,904
3,624
16,993
19,870
Year to
12/2013a
12/2015e
12/2016e
Y-o-y % change
Revenue
EBITDA
EBIT
PBT
HSBC EPS
13.9
27.3
28.0
38.9
38.9
20.9
17.5
17.8
23.3
23.3
14.0
10.7
10.8
19.2
19.2
0.1
5.0
4.1
4.3
34.2
33.1
3.2
21.3
3.6
26.4
0.2
6.1
5.4
4.9
38.2
37.2
4.7
18.6
2.6
36.9
0.2
7.0
6.4
5.8
37.1
36.3
5.6
17.6
2.2
31.8
0.2
7.6
7.4
6.5
36.1
35.3
8.5
16.0
1.8
44.5
0.63
0.63
0.00
15.73
24.83
0.88
0.88
0.00
16.61
26.61
1.08
1.08
0.50
17.19
27.89
1.29
1.29
1.00
17.48
28.71
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
HSBC EPS
DPS
NAV
NAV (adjusted)
210
12/2016e
0.9
0.5
21.6
6.9
0.0
0.8
0.5
15.5
8.7
0.0
0.8
0.5
12.6
7.3
3.7
0.8
0.5
10.6
9.5
7.4
Issuer information
Share price
(SAR)13.60
Reuters (Equity)
Market cap (USDm)
Free float (%)
Country
Analyst
Target price (SAR)
4300.SE
3,916
71
Saudi Arabia
Patrick Gaffney
Price relative
16
15
14
13
12
11
10
9
8
7
6
2012
2013
Source: HSBC
-17.6
-19.2
-18.1
-31.1
-31.1
12/2015e
Dar Al Arkan
12/2014e
12/2014e
Premium/ (discount) to NAV

Premium/ (discount) to NAV (adj)
PE*
FCF yield (%)
Dividend yield (%)

Year to
12/2013a
2.9
14.00
Bloomberg (Equity)
ALARKAN AB
Market cap (SARm)
14,688
17274
Sector
REAL ESTATE
Contact
+966 1 299 2100
2014
16
15
14
13
12
11
10
9
8
7
6
2015
abc
Equities
Saudi Arabia
July 2014
Jabal Omar
JOMAR AB, Price SAR53, Neutral,
TP SAR47
Company description
debt. It appears that the revenue will not be

recognized until next Hirji year (starting in late
October), based on comments from the company.

Analyst
HSBC Saudi Arabia
+ 966 1 299 2100
Established in 2006 by royal decree, the company

was set up as the master developer for the Jabal
Omar area, next to the Al Haram Mosque in
Mecca. The project will be a mixed use
development spread on around 230,000sqm of
land and c2 million sqm of BUA. It will be
comprised of 38 high-rise buildings with 26 hotels
and over 11,000 rooms. They will partner up with
international hotel operators to operate the hotels.
This will be one of the largest hotel developments
in the world. They will also build a 14,000sqm
mosque that can hold up to 150,000 people. The
project will also include 200,000sqm of retail
space as well as villas for sale.
The first hotel has also opened in April. It is a 480

room Hilton, split in two towers (one of which has
opened). We expect more hotels to open
throughout the year and we assume rates of
SAR1,200 on average per night and occupancy of
70% (once up and running, and on average
throughout the year).

Investment thesis
Shares of Jabal Omar have soared 77% this year
and we believe the shares are now fully valued.
We also believe risks are also relatively high as
JOMAR has experienced multiple delays and has
no previous experience with projects of this size,
even though we remain positive on the project in
the longer term.
Villa auctions have started with Jabal Omar
announcing in June that it sold 8 villas in for
SAR320.5m, or SAR40m per villa. The high price
is attributed to the location - the units will
overlook the Holy Mosque in Mecca. The average
price per sqm was SAR122,375 or USD32,633.
The company has a further 12 to sell in this first
phase. Jabal Omar will use the cash to pay down
Financials
Jabal Omar showed significant improvement but
still recorded a loss in 2Q2014 of SAR0.47m
compared to a loss of SAR6.1m in 2Q2013.
Notably, gross profit was solid at SAR12.7m.
This is an improvement on both a QoQ and YoY
basis, as the company starts to recognize revenue
from its retail space. The company also had lower
SG&A according to JOMAR which contributed to
an improvement in the bottom line. Overall, it
appears that construction is progressing fairly well
(albeit slower than the original announcements)
and we should see a significant increase in
revenues and profits this year. The first hotel, a
Hilton, is open (according to the hotel website,
which is currently taking reservations), and we
should see continuous openings of other hotels
throughout this year and for the next few years.
Note that Jabal Omar follows the Hijri calendar,
so its 2Q2014 ended 29 April 2014.
211
abc
Equities
Saudi Arabia
July 2014
Valuation
Risks
We value Jabal Omar using a discounted cash

flow model for Phases 1-3 of the project
(SAR42.3 per share) and then we add the
remaining land value (SAR10.4 per share). We
use an average price of SAR150,000 per sqm and
then apply a 20% discount.
Downside risks to our rating include:
We then subtract net debt of SAR5.4 per share to

arrive at the company's equity value of SAR47
per share.
In our DCF, we assume a risk-free rate of 6.5%
(3.0% represents US Treasuries and 3.5% is the
inflation differential for Saudi), a country risk
premium of 6% and a beta of 1.3 (based on the
three-year beta from Bloomberg). This results in a
cost of equity of 14.3%. Coupled with a cost of
debt of 6%, this leads to a WACC of 10.9%. We
assume a terminal growth rate of 5%
above and below the hurdle rate for Saudi Arabia
stocks of 9.0%, or 4% to 14% potential return
from the current price. At the time we set our
target price, it implied a potential return which
was within the Neutral band; we therefore have a
Neutral rating on the stock. Potential return equals
212
Once the company is producing high cash

flows from its operations, it may undertake
value-destructive projects.
The company has limited experience in
construction and just a short history of being a
public company.
There is a very wide ownership, including a
large number of founder owners that make up
32% of the total ownership. The founders
shares could overhang the stock.
Upside risks to our rating include:
If the company is able to build the phases
faster than we expect, the shares could rise.
Selling prices for the villas could be
significantly higher than we anticipate,
given their scarcity. This would likely boost
the shares.
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Jabal Omar Development Co

Valuation data
Year to
12/2013a
12/2014e
12/2015e
12/2016e

Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
46
-25
-24
-49
0
-33
-33
0
-33
-33
2,650
1,304
-23
1,281
-46
1,234
1,234
-31
1,204
1,204
2,915
1,447
-23
1,424
-179
1,245
1,245
-31
1,214
1,214
4,719
2,460
-23
2,437
-233
2,204
2,204
-55
2,149
2,149

Capex
FCF enterprise
Dividends
Change in net debt
FCF equity
Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
64
-2,381
-2,335
-2,381
0
2,487
-2,335
821
-1,751
-884
-1,751
0
929
-930
1,060
-2,001
-763
-2,001
0
941
-942
2,081
-1,001
1,312
-1,001
0
-837
1,079
12,439
3,397
2,889
18,177
7,153
4,264
10,142
12,069
12,640
1,967
1,448
18,725
6,653
5,205
11,356
12,448
10,840
2,367
1,785
20,102
6,153
4,367
13,262
10,741
(SARm)
12,189
2,872
2,818
15,925
6,153
3,335
8,938
11,412
12/2013a
Year to
12/2013a
12/2014e
12/2015e
12/2016e
5.5
1.1
4.9
1.0
40.9
-2.0
0.0
4.3
0.9
40.6
-2.1
0.0
3.7
0.8
22.9
2.5
0.0

PE*
FCF yield (%)
Dividend yield (%)
12/2014e
12/2015e
12/2016e
Y-o-y % change
-4.8
0.0
Issuer information
Share price
(SAR)53.00
Reuters (Equity)
Market cap (USDm)
Free float (%)
Country
Analyst
Target price (SAR)
4250.SE
13,133
91
Saudi Arabia
Patrick Gaffney
-11.3
47.00
Bloomberg (Equity)
JOMAR AB
Market cap (SARm)
49,258
51683
Sector
REAL ESTATE
Contact
+966 1 299 2100
Price relative
56
56
46
46
36
36
26
26
16
16
6
2012
2013
Jabal Omar Development Co

Year to
Neutral
2014
6
2015
Source: HSBC
Revenue
EBITDA
EBIT
PBT
HSBC EPS
5712.8
10.0
11.0
11.2
0.9
0.9
61.9
70.0
71.1
77.0
77.0
37.3
-134.4
1.9
0.2
10.6
12.6
7.3
49.2
48.3
28.3
42.0
3.3
19.3
0.2
11.3
11.3
7.5
49.7
48.8
8.1
45.8
3.6
20.4
0.4
20.5
17.5
12.2
52.1
51.6
10.6
32.9
1.8
47.6
-0.04
-0.04
0.00
9.62
50.42
1.30
1.30
0.00
10.91
55.33
1.31
1.31
0.00
12.22
58.61
2.31
2.31
0.00
14.27
64.64
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
0.0
-0.5
-0.4
-0.2
-54.4
-108.1

HSBC EPS
DPS
NAV
NAV (adjusted)
213
abc
Equities
Saudi Arabia
July 2014
Saudi Real Estate Co.

SRECO AB, Price SAR43.4, Neutral,
TP SAR40
Company description
Saudi Real Estate Company (SRECO), also
known as Al Akaria, is a real estate developer
focused on developing and managing rental
properties, mainly in Riyadh. Recurring rentals
are the main driver of revenues, although the
company occasionally sells land plots, which can
result in a significant increase in annual revenue
and profit. Over time, we expect SRECO will
develop more projects, such as it is already doing
with Knowledge Economic City (KEC) in
Medina, and a residential development in Binban,
transforming the company into a developer, rather
than just a property manager.
Investment thesis
SRECO is the only publicly-traded company we
cover in Saudi with a large investment property
portfolio currently producing income. We believe
this gives investors a good opportunity to gain
exposure to strong rental inflation in Saudi. Our
economists expect inflation to increase by 3.5% in
2014 and 4.3% in 2015, and this will likely result
in a continued increase in rents.
What would make the stock more attractive, in
our view, is if the company were to start to
monetise its 13.0 m sqm land bank. Yet it rarely
develops or sells any of it: it made no land sales in
2013, and in 2012, it made just one (for SAR80m
in 3Q). We saw a similar pattern in 2011, when
the company made only one SAR30m sale.
214
The company has talked for some time about a

development in Binban, a city north of Riyadh
where it has 2m sqm of land. However, we still
have not seen any progress, and until we see the
actual start of construction, we will not include it
in our model.
All-in-all the stock appears fully valued, in our
view, especially with a 2014e dividend yield
below 3.0%.
Financials
Saudi Real Estate Company reported 2Q2014
earnings of SAR48m, beating our SAR40.4m
estimate and higher than the SAR19.3m profit they
reported in the same period last year (although they
recognized a SAR17.7m loss from their Arabian
United Float Glass Company in 2Q2013). Even
after excluding the SAR17.7m loss in 2Q2013,
earnings in 2Q2014 were still 30% higher YoY. The
company attributes the strong beat to the associate
income line (although no further details were
given). SRECO reported SAR45.3m in gross profit
which was 8.5% lower than our estimate but 9.2%
up YoY, while operating profit of SAR36.7m was
17% lower than our estimate for the quarter but flat
compared to the same period last year. Although the
company did not provide further details, we assume
revenues were weaker than we expected this
quarter. More details as full financials are released.

Analyst
HSBC Saudi Arabia
+966 1 299 2100
abc
Equities
Saudi Arabia
July 2014
Valuation
Risks
We use a DCF approach to value SRECO's current

projects (SAR24.6 per share) and then add the value
of the remaining land bank at a 10% premium to cost
(SAR10.4 per share), plus the short-term
investments most of which are held in money
market funds (SAR4.5) and the net cash (SAR0.2
per share). Previously we valued the land at cost, but
we now raise the valuation to reflect our expectation
of continued inflation in Saudi.
Downside risks to our Neutral rating include:
For our WACC calculation, our assumptions

include: a 3.0% risk free rate, a 6% country risk
premium and a 3.5% inflation differential between
the US and Saudi (the average over the past five
years). We use a beta of 0.9 to arrive at our cost of
equity of 11.9%. We then assume a cost of debt of
4% and a 20% debt weighting, which leads to our
WACC estimate of 10.2%. We assume a terminal
growth rate of 3% (unchanged). Note that we do
not include future land sales in our valuation.
Overall this results in a target price of SAR40.
and below the hurdle rate for Saudi Arabia stocks of
9.0%, or 4% to 14% potential return from the
current price. At the time we set our target price, it
implied a potential return within the Neutral band;
we therefore have a Neutral rating. Potential return
Oversupply in the office space in Riyadh

could put upward pressure on market yields
and hurt SRECOs valuation.
The shift from single-building lease
properties to large-scale sale projects could
stretch management and operational capacity,
introducing the risk of delays or cancellations.
Since most of SRECOs projects are in
Riyadh, exposure to any downturn in the
property market there is high.
Upside risks to our Neutral rating include:
If land and project sales are faster than
expected, the stock could outperform the
broader market.
If the Riyadh property market is boosted by
government spending faster than other Saudi
markets, then SRECO would benefit.
215
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Saudi Real Estate

Valuation data
Year to
12/2013a
12/2014e
12/2015e
12/2016e

Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
259
193
-30
163
0
191
191
-11
180
180
282
205
-29
176
0
180
180
-16
163
163
301
219
-31
188
4
192
192
-16
175
175
318
231
-33
198
0
198
198
-17
181
181
193
-54
127
-45
-121
-16
127
235
231
462
264
-150
-349
462
206
-31
172
8
-180
-34
175
215
-33
182
8
-180
-42
182
2,270
166
18
3,566
0
-18
3,304
2,172
1,981
446
368
3,553
0
-368
3,317
1,840
1,950
496
401
3,563
0
-401
3,313
1,821
1,917
541
444
3,568
0
-444
3,314
1,787

Capex
FCF enterprise
Dividends
Change in net debt
FCF equity
Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
(SARm)
12/2013a
12/2014e
12/2015e
6.8
6.9
6.9
6.7
7.2
5.4
5.4
5.3
3.3
3.5
0.1
7.1
5.5
5.1
74.7
63.1
0.1
8.0
4.9
4.6
72.6
62.3
0.2
9.4
5.3
4.9
72.7
62.3
0.2
10.1
5.5
5.1
72.7
62.3
-0.6
-0.1
-11.1
-1.8
-12.1
-1.8
-13.4
-1.9
1.50
1.50
1.00
27.53
42.00
1.36
1.36
1.25
27.65
42.11
1.46
1.46
1.50
27.61
42.07
1.51
1.51
1.50
27.62
0.00
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
HSBC EPS
DPS
NAV
NAV (adjusted)
216
12/2015e
12/2016e
1.6
1.0
29.0
2.4
2.3
1.6
1.0
31.9
8.9
2.9
1.6
1.0
29.7
3.4
3.5
1.6
28.7
3.5
3.5
Issuer information
Share price
(SAR)43.40
Reuters (Equity)
Market cap (USDm)
Free float (%)
Country
Analyst
Target price (SAR)
4020.SE
1,389
100
Saudi Arabia
Patrick Gaffney
-7.8
40.00
Bloomberg (Equity)
SRECO AB
Market cap (SARm)
5,208
4840
Sector
REAL ESTATE
Contact
+966 1 299 2100
Price relative
49
49
44
44
39
39
34
34
29
29
24
24
19
2012
2013
9.1
6.0
7.7
-5.8
-9.0
12/2014e
12/2016e
-20.4
7.2
1.1
-0.5
0.0
12/2013a

PE*
FCF yield (%)
Dividend yield (%)
Source: HSBC
Y-o-y % change
Revenue
EBITDA
EBIT
PBT
HSBC EPS
Year to
Saudi Real Estate

Year to
Neutral
2014
19
2015
abc
Equities
Saudi Arabia
July 2014
Emaar Economic City

EMAAR AB, Price SAR17.5, Not
Rated
Company description
To facilitate investment in the city, the Saudi

Arabian General Investment Authority (SAGIA)
will provide 128 services under one roof.
Emaar, The Economic City (EEC), was

established in 2006 by Dubai-based Emaar PJSC
and other prominent investors. The company is
leading the planning and development of the King
Abdullah Economic City (KAEC), to be situated
along the Red Sea coast, between major shipping
routes connecting Europe, Africa and Asia, and
north of the commercial centre of Jeddah.
Financials
KAEC will be spread over 168m sq m and will be

developed as an investment and lifestyle
destination intended to help drive economic
growth in Saudi Arabia. The city is to be fully
developed by 2025. Development will take place
in four phases, with the first phase currently under
construction. KAEC will have a sea port, an
industrial zone, a central business district, an
educational zone, resorts and a residential area.
The port at KAEC became operational in January
with the opening of a container terminal capable
of handling 1mn twenty foot equivalent (TEU)
units a year. Once complete, the port will
eventually handle 20mn TEU, making it one of
the biggest in the world. The industrial zone will
be spread over 63m sq m and will be home to
about 2,500 factories upon completion, according
to the company. KAEC is projected to create up to
1 million job opportunities and house about 2
million residents.
Emaar Economic City reported 2Q 2014 net

income of SAR212.8m compared to net income of
SAR49.9m in 2Q2013. The company reported
gross profit of SAR287.8m for the quarter vs.
SA117.6m in Q2 2013.
According to the company the increases in the
quarter were due to an increase in sale of industrial
lands and the completion of selling the entire port
land to the Ports Development Company
Recent news
On 7 July 2014, Emaar The Economic City
has announced that its shareholders have
approved a plan to raise USD1.4bn
(SAR5.2bn) so it can invest in the expansion
of the port at King Abdullah Economic City
(KAEC). The company said it would use
USD700m (SAR2.6bn) to increase its stake in
the Port Development Company at KAEC.
This would bring its stake in the firm to just
over 50% with joint venture partner Huta
Marina holding the rest of the shares. Its
investment will be used to help develop the
next phase of the port, which will then drive
the growth of the neighbouring Industrial
Valley that takes up around one-third (63mn
m2) of the city's 189mn m2 built-up area.
217
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Emaar The Economic City

Year to
Valuation data
12/2010a
12/2011a
12/2012a
12/2013a

Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
91
-532
-58
-590
0
-578
-578
-6
-584
-584
408
170
-45
125
0
89
89
-6
83
83
545
266
-47
219
-1
191
191
-5
186
186
834
308
-26
282
61
304
304
-31
273
273
-340
-170
-185
0
525
15
-64
-174
-3565
0
516
278
-330
-186
1862
0
874
358
97
-568
-594
0
1214
743
550
1564
339
8877
0
-339
7298
8538
517
6005
4885
13746
5062
177
7380
8861
569
4822
4117
13878
5168
1051
7563
9761
2108
4443
3039
14346
5304
2265
7836
11307

Capex
Dividends
Change in net debt
FCF equity
Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Year to
12/2010a
12/2011a
12/2012a
12/2013a
-65.1
98.4
93.3
98.2
89.0
348.5
33.7
56.3
75.8
115.8
125.3
52.9
15.9
28.5
59.2
46.7
0.0
-7.0
-8.0
-6.6
-585.5
-649.2
0.0
1.3
1.1
0.9
41.7
30.6
0.1
2.2
2.5
1.6
48.8
40.2
-4.6
0.6
100.3
2.4
1.0
-36.0
13.9
4.0
-31.4
0.1
2.2
3.5
2.0
37.0
33.8
-5.0
28.9
7.4
4.3
-0.69
-0.69
0.00
8.59
8.59
0.10
0.10
0.00
8.68
8.68
0.22
0.22
0.00
8.90
8.90
0.32
0.32
0.00
9.22
9.22

HSBC EPS
DPS
NAV
NAV (adjusted)
218
12/2012a
12/2013a
2.0
2.0
2.0
1.9
2.0
2.0
180.1
-1.6
0.0
2.0
79.9
-3.5
0.0
1.9
54.5
-3.2
0.0
-3.4
0.0
Issuer information
Share price
(SAR)
17.5
Reuters (Equity)
Market cap (USDm)
Free float (%)
Country
Analyst
4220.SE
3,967
55%
Saudi Arabia
NR
Target price (SAR)
NR
19
19
17
17
15
15
13
13
11
11
9
7
2013
Source: HSBC
24.4
Bloomberg (Equity)
EMAAR AB
Market cap (SARm)
14,875
15,926
Sector
REAL ESTATE
Contact
NR
Price relative
Emaar EC
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
12/2011a
Y-o-y % change
Revenue
EBITDA
EBIT
PBT
HSBC EPS
12/2010a

PE*
FCF yield (%)
Dividend yield (%)
7
2012

Year to
Not Rated
2014
Rel to Tadawul
Equities
Saudi Arabia
July 2014
abc
Insurance
219
abc
Equities
Saudi Arabia
July 2014
Insurance
The insurance industry is experiencing rapid growth from a low base
and remains relatively fragmented: Tawuniya is a leading player

The introduction of compulsory health insurance is a key driver
A lack of experience in setting rates may be a risk for the sector
Rapid growth
The insurance market in Saudi Arabia has
experienced one of the highest growth rates within
the industry globally in the last few years: Nonlife premiums more than doubled to SAR24.4bn
in 2013 from SAR10.2bn in 2008, according to
data from the Saudi Arabian Monetary Authority
(SAMA). Industry revenues grew by about 19%
y-o-y in 2013.
Over half of the growth has come from the health
segment, driven by progressively stricter
requirements for Saudi Arabian businesses to
provide employees with health insurance: In 2011,
health premiums reached SAR11.3bn, three times
the level in 2007 and up 16% on 2011. Motor
insurance is the second largest segment, with
premiums at SAR6.4bn in 2013 (+36% on 2012)
followed by property premiums at SAR1.6bn

(+24% on 2012).
Life insurance has experienced the fastest growth
of all areas of Saudi insurance, with revenues
increasing fivefold between 2006 and 2010.
However, as this comes from a very low base,
gross premiums from life underwriting still did
not exceed SAR1bn in 2013 and equated to only
about USD10 per capita. As in other GCC
countries, one key challenge for the life insurance
market is that many local citizens do not believe
that they need coverage, given a very generous
cradle-to-grave social safety net.
Ranking of companies by premiums (2010-2011)
Company
Tawuniya
Medgulf
BUPA Arabia for Coop. Ins.
United Cooperative Assurance Co.
Malath Coop. Ins. & Reins. Co.
Saudi Arabian Coop. Ins. Co.
Allianz Saudi Fransi Coop. Ins. Co.
Trade Union Coop. Ins. Co.
Gulf Union Coop. Ins. Co.
SABB Takaful
Source: Company data
220
_________ Gross written premiums (SARm) __________

2012
2011
% change
5,635
3,318
2,194
1,024
558
568
621
561
418
223
4,431
2,811
1,993
1,069
601
548
684
538
329
268
27%
18%
10%
-4%
-7%
4%
-9%
4%
27%
-17%
Market cap
USDm
Average 3M
trading vols
USDm
773
674
592
121
163
125
403
166
138
299
4.6
6.3
8.8
2.3
4.5
6.3
5.9
2.4
3.0
3.7
Raj Sinha*
Analyst
+ 971 4423 6932
raj.sinha@hsbc.com
abc
Equities
Saudi Arabia
July 2014
Gross written premiums (SARm)

30000
Life Protection &

Savings
Aviation
25000
Energy
20000
Accident/Liability
15000
Marine
Engineering
10000
Property
5000
Motor
Health
0
2008
2009
2010
2011
2012
2013
Source:SAMA
Even though it seems likely that the growth rate in

the Saudi insurance industry will moderate, we
note that Saudi Arabia remains one of the world's
most underinsured nations: Industry revenues
were only 1.16% of GDP in 2013, up from 0.42%
in 2005.
This not just a fraction of the level in the OECD
countries (for example, the share is over 10% in
France and 13% in the United Kingdom), but it is
also among the lowest in the GCC. Even though
the low level of cover in the life sector stands out,
industry revenues are relatively low across all
insurance segments.
High population and per-capita economic growth
should help continue to drive industry revenues,
in our view. Moreover, even though the
population is overwhelmingly young, with over
50% below the age of 20 (excluding expats), the
higher age brackets appear set to experience
significant growth, likely helping to drive
healthcare costs and health insurance revenues.
For example, we estimate 6% average annual
growth to 2015e in the number of Saudis aged
between 45 and 59 about 3 times higher than
that of the overall population.
Annual healthcare spending in Saudi Arabia at

USD1,150 per capita is above the broader
regional average, but still very low by
international standards and relative to GCC peers.
We expect Saudi healthcare spending to increase
at a CAGR in excess of 8% over the next five
years, reaching USD30bn by 2015e. Business
Monitor International sees total Saudi Arabia
gross insurance premiums increasing at a CAGR
of 14% to 2015, driven by the health segment.
Leading players
The Saudi Arabian insurance sector is regulated
by the Saudi Arabian Monetary Authority. All
operators are required to operate according to the
principles of cooperative insurance. Collectively,
they form the largest Shari'ah-compliant sector in
the world.
The sector is relatively fragmented, with SAMA's
2013 annual report identifying 35 companies. By far
the largest player is Tawuniya, which wrote 22% of
gross premiums in 2013, followed by Medgulf with
a 16.4% market share and BUPA with 12.6% share.
All of the ten leading companies are listed on the
Tadawul stock exchange.
221
abc
Equities
Saudi Arabia
July 2014
The Mediterranean & Gulf

Insurance & Reinsurance
Co (Medgulf)
MEDGULF AB; Not Rated
Company description
The Mediterranean & Gulf Insurance &

Reinsurance Co (Medgulf) is a subsidiary of
Medgulf Group, a leading investment group, with
large finance and insurance operations in the
Middle East. Medgulf operates in Saudi Arabia,
Lebanon, Turkey, Jordan, UAE and the UK.
Largely due to acquisitions, it provides a range of
insurance and reinsurance products in the Middle
East and the UK. The company was founded in
October 1977 and is headquartered in Riyadh,
Saudi Arabia. It is the second-largest insurance
company in Saudi Arabia. Its major shareholders
are Medgulf Group, with 40.5% ownership, and
Saudi Investment Bank, with 19%.
Medgulf offers Islamic non-life insurance and
reinsurance services. Its main businesses include:
Medical insurance: The company acts as an
administrator for managing and servicing the
medical portfolio of group insurance plans. It
also provides comprehensive health-insurance
management to other health insurers (73% of
GWPs in 2013).
Motor insurance: This division services and
manages a large portfolio of vehicles. It also
operates a network of workshops, spare part
dealers and loss adjusters. The company
handles claims management for those units
(18% of GWPs in 2013).
222
Medgulf is backed by international reinsurance

companies in the US and Europe, among them
Swiss RE, Hannover RE, Lloyds of London, Gen
RE, and Arab RE.
Financials
The gross premium written in FY 13 (ended 31
December 2013) was SAR4,137m, posting a 15%
y-o-y increase. However, the company posted a
net loss of SAR192m over FY 13. Management
attributed the loss to a 45% increase in net claims.
The company ended the year with a combined
ratio of 115%.
Medgulf's gross written premiums for Q412
reached SAR861m vs. SAR487m in Q411. The
net profit for Q412 was SAR116m, a 6.4%
increase from the same period last year.
Recent news
On 1 June, 2014, Medgulf announced the
renewal of its contract with Saudi Binladin
Group (SBG). Medgulf provides co-operative
medical insurance to SBG employees. This
contract constituted over 5% of Medgulfs
revenues in FY 13.
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Medgulf
Not Rated
Valuation data
Year to
12/2010a
12/2011a
12/2012a
12/2013a
1,871
40
249
240
240
240
240
2,189
47
205
201
201
201
201
2,598
56
-234
-192
-192
-192
-192
347
952
67
0
2,931
1,094
22
0
-347
1,174
649
511
62
0
3,149
1,472
26
0
-649
1,186
1,109
558
70
0
4,084
2,232
34
0
-1,109
996

Net earned premium
Other income
Operating profit
PBT
HSBC PBT
Net profit
HSBC net profit
1,792
32
253
232
232
232
232

Cash & equivalents
Investments
Tangible assets
Intangible assets
Total assets
Policy liabilities
Provision for risks
Gross debt
Net debt
Shareholder funds
217
896
57
0
3,159
1,133
20
0
-217
1,069

Year to
12/2010a
12/2011a
12/2012a
12/2013a
37.8
0.4
0.6
4.4
0.0
0.0
17.0
-0.2
-0.2
18.7
-2.0
-2.0
Y-o-y % change
Net earned premium
Reported PBT
EPS
Year to
12/2010a
12/2011a
12/2012a
12/2013a
16.8
3.6
1.5
16.2
3.3
2.6
19.3
3.3
4.1
3.9
0.0
PE reported
Price/NAV
Dividend yield (%)
Issuer information
Share price (SAR)
Reuters (Equity)
Market cap (USDm)
Country
Analyst
38.93 Target price (SAR)

8030.SE
1,050
Saudi Arabia
NA
NA
Bloomberg (Equity)
Market cap (SARm)
Sector
Contact
MEDGULF AB
3,939
Insurance
NR
Price relative
40
40
30
30
20
20
10
10
0
2012
0
2013
Megulf
2014
Rel to Tadawul
Source: HSBC
Note: price at close of Jul 22 2014

EPS
DPS
Book value
2.32
2.32
0.60
10.69
2.40
2.40
1.00
11.74
2.01
2.01
1.60
11.86
-1.92
-1.92
0.00
9.96
223
abc
Equities
Saudi Arabia
July 2014
The Company for

Cooperative Insurance
(Tawuniya)
TAWUNIYA AB; Not Rated
Company description
The Company for Cooperative Insurance
(Tawuniya), established in 1986, is the largest
company in the Saudi insurance sector.
Tawuniya is focused on non-life insurance
products. Medical insurance comprises the largest
share of its premiums at 64% of gross premiums
written in FY 13. Auto insurance accounts for the
second largest share of premiums at 19%,
followed by other property and casualty products.
The central region accounted for 64% of written
premiums in 2013, with the western and eastern
region of Saudi accounting for 15% and
16%, respectively.
Tawuniya's principal associates/investments
include:
United Insurance Company, incorporated in
Bahrain, via a 50% stake
Waseel Application Services Provider,
incorporated in Saudi Arabia, 45% stake
Cooperative Real Estate & Investment Co,
incorporated in Saudi Arabia, 33% stake
Najm insurance services, incorporated in
Saudi Arabia, 8% stake
224
Tawuniya is 23.8% owned by the Saudi Public

Pension Agency (PPA) and 22.8% by the Saudi
General Organisation for Social Insurance
(GOSI). The remaining 53% is free float.
Financials
In FY 13 (ended 31 December 2013), gross
written premiums came in at a flat SAR5,605m,
down from SAR5,635m in 2012. However,
premiums earned increased by 20% to reach
SAR4,728m. The company posted a combined
ratio of 102% for the year, and reported a net loss
of SAR591m.
Over 1H 2014, the company reported net income
of SAR233m, citing a decrease in claims incurred
and higher investment income as causes. The 1H
14 combined ratio was 100%.
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Tawuniya
Not Rated
Valuation data
Year to
12/2010a
12/2011a
12/2012a
12/2013a
2,659
9
553
494
494
64
3,098
5
500
457
457
-9
3,951
15
356
329
329
-27
4,728
8
-686
-585
-585
-285
64
-9
-27
-285
193
3,746
147
0
5,907
2,292
1,557
0
-193
1,769
212
3,840
177
0
6,134
2,406
1,895
0
-212
2,049
390
3,937
236
0
7,095
3,033
2,445
0
-390
2,143
1,091
3,845
266
0
7,776
3,777
2,358
0
-1,091
1,641

Net earned premium
Other income
Operating profit
PBT
HSBC PBT
Net profit
HSBC net profit

Cash & equivalents
Investments
Tangible assets
Intangible assets
Total assets
Policy liabilities
Provision for risks
Gross debt
Net debt
Shareholder funds

Year to
12/2010a
12/2011a
12/2012a
12/2013a
28.9
0.6
-0.8
16.5
-0.1
-1.1
27.5
-0.3
1.9
19.7
-2.8
9.5
Y-o-y % change
Net earned premium
Reported PBT
EPS
Year to
12/2010a
12/2011a
12/2012a
12/2013a
78.0
2.8
4.0
2.4
3.0
2.3
5.3
3.0
0.0
PE reported
Price/NAV
Dividend yield (%)
Issuer information
Share price (SAR)
Reuters (Equity)
Market cap (USDm)
Country
Analyst

8010.SE
1,323
Saudi Arabia
NA
NA
Bloomberg (Equity)
Market cap (SARm)
Sector
Contact
TAWUNIYA AB
4,960
Insurance
NR
Price relative
60
60
50
50
40
40
30
30
20
20
10
10
0
2012
0
2013
Tawuniya
2014
Rel to Tadawul
Source: HSBC

EPS
DPS
Book value
0.64
0.64
2.00
17.69
-0.09
-0.09
1.50
20.49
-0.27
-0.27
2.62
21.43
-2.85
-2.85
0.00
16.41
225
abc
Equities
Saudi Arabia
July 2014
Malath Cooperative
Insurance & Reinsurance
Co (Malath)
MALATH AB; Not Rated
Company description
Malath Cooperative Insurance & Reinsurance
Company was founded in 2004 with a paid-up
capital of SAR300m. The company provides a
wide range of insurance products in various
classes including Aviation, Energy, Engineering,
Marine (cargo & hull), motor insurance, and
health insurance for groups and individuals.
Malaths principal investments include:
Saudi Re for Cooperative Reinsurance with a
3.75% stake
Najm Insurance Services Company with a
7.69% stake
Sukuk issued by SEC, GACA, and Tasnee,
valued at SAR70m, as well as various Sukuk
funds, equity funds, and Murabaha contracts.
Malath stresses the importance of a wider
geographic presence over Saudi, having obtained
SAMA approval to open 50 new outlets over the
next few years.
226
Financials
Gross premiums written in FY 13 (ended 31
December 2013) increased 38% to SAR771m.
Malath posted a net loss of SAR42m for FY 13,
down from net income of SAR30m in FY 12.
The company attributed the loss to price pressure
from competition as well as a 77% increase in
incurred claims, y-o-y. The company ended the
year with a combined ratio of 110%.
For 1H 14 (ended 30 June 2014), the company
reported losses of SAR17m. However, gross
written premiums were up 52%, y-o-y. The period
closed with a combined ratio of 112%.
Recent news
On 3 July 2014, Malath announced an agreement
with Abdullatif Jameel Insurance Agents (AJIA).
The agreement stipulates that AJIA will become a
distributor of Malath policies, exclusively. AJIA is
affiliated with Abdullatif Jameel Co. Ltd, currently
the sole distributor of Toyota cars in Saudi.
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Malath
Not Rated
Valuation data
Year to
12/2010a
12/2011a
12/2012a
12/2013a
325
21
26
23
23
18
18
398
14
23
21
21
14
14
463
17
40
37
37
30
30
662
14
-30
-30
-30
-42
-42
41
446
14
0
727
303
0
0
-41
263
44
478
15
0
807
335
0
0
-44
281
54
497
13
0
831
336
0
0
-54
323
278
375
10
0
960
443
0
0
-278
291

Net earned premium
Other income
Operating profit
PBT
HSBC PBT
Net profit
HSBC net profit
Cash & equivalents
Investments
Tangible assets
Intangible assets
Total assets
Policy liabilities
Provision for risks
Gross debt
Net debt
Shareholder funds

Year to
12/2010a
12/2011a
12/2012a
12/2013a
148.6
1.0
1.5
22.5
-0.1
-0.2
16.2
0.8
1.2
43.2
-1.8
-2.4
Y-o-y % change
Net earned premium
Reported PBT
EPS
Year to
12/2010a
12/2011a
12/2012a
12/2013a
35.7
2.5
0.0
45.8
2.3
0.0
21.2
2.0
0.0
-15.4
2.2
0.0
PE reported
Price/NAV
Dividend yield (%)
Issuer information
Share price (SAR)
Reuters (Equity)
Market cap (USDm)
Country
Analyst

8020.SE
172
Saudi Arabia
NA
NA
Bloomberg (Equity)
Market cap (SARm)
Sector
Contact
MALATH AB
645
Insurance
NR
Price relative
40
40
30
30
20
20
10
10
0
2012
0
2013
Malath
2014
Rel to Tadawul
Source: HSBC

EPS
DPS
Book value
0.60
0.60
0.00
8.75
0.47
0.47
0.00
9.35
1.02
1.02
0.00
10.75
-1.39
-1.39
0.00
9.70
227
abc
Equities
Saudi Arabia
July 2014
228
Equities
Saudi Arabia
July 2014
abc
Telecoms
229
abc
Equities
Saudi Arabia
July 2014
Telecoms
Saudi remains at the forefront of mobile data with smart phone
penetration of more than 70%, one of the highest levels globally

Growth in major infrastructure projects and a desire to retain
control of content within Saudi is creating an attractive opportunity

in ICT for STC and Mobily
We expect MVNOs to increase pricing pressure in the medium
term; data price competition is affecting the market currently
The Saudi telecom market

Saudi mobile is a rare example of a market that, in
terms of subscribers, has not grown since 2010
but has still grown its top line strongly thanks to
excellent monetisation of mobile data. CITC, the
Saudi regulator, reported that the total number of
mobile subscriptions had reached around 50.9mn
by the end of 2013, with a penetration rate of
170%. At the end of 2010 the numbers were
reported as 51.6m with penetration of 186%.
Growth is in fact mostly driven by sharp increase
of data usage, now one of the highest in Emerging
EMEA. As penetration slowed down, the decline
in the number of subscribers was particularly
rapid in 2013 driven by:
The implementation of CITC's decision
regarding the regulation of the sale and
activation of pre-paid SIM cards, which led
service providers to deactivate a large number
of unidentified SIM cards.
CITCs decision to stop free international
roaming which resulted in cancellation of a
large number of SIM-cards which had been
exported outside the Kingdom.
230
The repatriation of illegal workers which led

to the cancellation of a large number of
prepaid SIM cards.
The first two of these measures has had no impact
on the revenue within the market, merely leading
to a mathematical benefit to ARPU. The latter
issue is expected to dampen revenue growth for a
limited period although subscribers affected by
these measures are likely to be amongst the lowest
spending customers.
Saudi Telecom Company (STC) currently has
c45% market share, Mobily has c39% and Zain
KSA has c16%.
Mobile broadband: key growth driver

Rapid declines in smart phone prices and affordable
data packages have made internet access via mobile
devices easy and cheap, and we believe that by 2016,
75% of the population could be online compared to
55% at the end of 2013 (according to CITC). We
believe smartphones will become the primary means
of internet access in the future. Smartphone take-up
has grown very quickly with smartphone penetration
at more than 70%, one of the highest penetration
Herv Drouet*
Analyst
HSBC Bank plc
+44 20 7991 6827
abc
Equities
Saudi Arabia
July 2014
Saudi mobile subscribers (m)

60
200%
Saudi mobile broadband and internet penetration (%)

60%
50%
50
150%
40
30
100%
20
50%
10
40%
30%
20%
10%
0%
0%
2008
2009
2010
Subcribers (m)- LHS
2011
2012
2013
Penetration %- RHS
Source: CITC
levels globally. A young population and sharp

increase in the number of students in the Saudi
educational system should drive rapid expansion of
internet usage.
Social media driving increase

in data usage
With a predominantly young population, and
limited entertainment options, young Saudis are
big users of social media.
Twitter is particularly popular among the social
media platforms with Saudi Arabia having the
highest Twitter penetration in the world. Saudi
Arabia had 2.4m active Twitter users as of March
2014, which was 40% of all active Twitter users
in the Arab region. Similarly, Saudi Arabia
produced 40% of all tweets in the Arab market in
March 2014 (source: Arab Social Media Report).
Data pricing starts to come under

pressure
After a period of stability, data pricing has come
under some pressure during 2013 with Zain KSA, in
particular, offering unlimited-use packages. While
both STC and Mobily have seen an exponential
increase in data volumes in the past year both
operators have invested significantly in LTE
network build out and in installing fibre backbones.
In contrast, Zain KSA has remained constrained
in its investment for much of 2013, although the
2007
2008
2009
2010
Mobile broadband penetration
2011
2012
2013
Internet penetration
Source: CITC
agreement with the regulator to defer regulatory

fees, and the successful renegotiation of its debt,
should provide more headroom to invest going
forward. It is therefore particularly active in the
major metropolitan areas in selling data services
but users requiring national data coverage will
still be best served on Mobilys network. In terms
of voice services, Zain is dependent on roaming
arrangements, primarily on Mobilys network.
CITC issues three MVNO licenses: In June
2013, Saudi Arabia's telecoms regulator awarded
three mobile virtual network operator (MVNO)
licences. The recipients were: Jawraa Consortium
(Lebara), on Mobily's network; Virgin Mobile
Middle East & Africa (Virgin Mobile MEA), on
STC's network; and Axiom Telecom, on Zain's
network (but in April 2014 CITC announced a retender for MVNO on Zains network, which is
currently under process). CITC also prefers that
MVNOs have some control over service and
billing so that they can improve customer
satisfaction levels in the market.
Further, CITC intends that the wholesale
interconnection agreement between the operator and
the MVNO should be commercially negotiated
rather than mandated by the regulator. We believe
that STC and Mobily should be better placed in this
regard than Zain KSA. Through the MVNO they
can book wholesale revenues from the low cost
231
Equities
Saudi Arabia
July 2014
segment of the market and concentrate their

marketing and acquisition efforts on the higher
ARPU segments like the enterprise and post-paid
segments. We believe that Zain KSA will be most
negatively affected as we estimate that its customer
base is biased towards the more price sensitive
users. The 15% government levy on MVNO
revenues should curtail the profit opportunity and
prevent significant pricing pressure as a result of the
MVNO entrants (please see HSBC GCC Handbook
published on 4 Feb 2014 for more details).
232
abc
abc
Equities
Saudi Arabia
July 2014
Etihad Etisalat (Mobily)

EEC AB, Price SAR89.9, Neutral, TP
SAR98
Company description
Mobily is one of three mobile-phone operators in
Saudi Arabia. Etisalat (UAE) is the single biggest
shareholder with a 27.5% stake; the rest is held by
Saudi institutions and local retail investors. The
stock has a free float of c40% and a market cap of
cUSD18bn. Mobily made an exceptional start in
Saudi Arabia becoming EBITDA-positive in 2006
and gaining a SIM market share of more than 30%
within two years of starting operations. Currently,
we estimate the company has a market share of
around 39% in mobile as well as starting to build
a fixed-line business and a presence in what we
believe will prove a lucrative opportunity in the
Saudi market for information, communications
and technology (ICT).
Investment thesis
Mobily has been single minded in pursuing the
broadband opportunity in mobile with the result that
we estimate it has some 63% of the smartphone
market versus an overall subscriber market share of
around 40%. The overall Saudi mobile broadband
market is 48% penetrated, with penetration having
risen sharply in the past three years. As of 2013,
16.5 million Saudis were using internet through
both fixed and mobile devices, implying a
penetration rate of 55%, and the majority of these
users were online via their smartphones. The rapid
decline in smartphone prices, and affordable data
packages have made internet access easy and cheap,
and we believe that, by 2016, 75% of the population
will be online.
Mobily has spent heavily on capex in recent years

in order to be able to deliver these high bandwidth
services and will continue to invest at a high level
over the next five years to ensure it retains
leadership in this lucrative sector, as well as
diversifying further into the corporate services
arena and fixed broad band . We believe capex
will average around 18% of sales over the next 5
years but this should still leave scope for a steady
increase in the dividend paying capability. Our
current forecasts assume a dividend growth rate of
approximately 7% CAGR over the same period.
Cash flow has been negatively impacted in the
past few years by negative working capital which
has left the dividend uncovered. We anticipate
that this situation will improve during 2014.
The Saudi market structure has been attractive
with a 3 player market but with the third, Zain
KSA, struggling to achieve critical mass. Three
new MVNO licences were awarded in mid-2013
(one was re-tendered recently) but we expect the
impact will be mainly felt at the lower end of the
market which is currently primarily addressed by
Zain KSA.
Mobily is increasingly moving into the corporate
and fixed arena with its service portfolio, reducing
its reliance on pure mobile service delivery. With
high oil prices and sustained spending by the
government in the Saudi economy, corporate
activity has been rising in the Kingdom,
especially in the SME sector. The Saudi
government is keen to retain close control of its IT
infrastructure and information management with
the result that there have been major investments
by Mobily in data centres in the country.
233
abc
Equities
Saudi Arabia
July 2014
Mobily continued to make progress with its fibre

based FTTH and IPTV service in 2013 and targets
connecting 250,000 buildings, thus reaching
800,000 unique residential and business
subscribers by 2016.
Recent news
Recently the company saw cancellation of the
IRU (Indefeasible Rights of Use) deal with
Etihad Atheeb which resulted in a write-off of
SAR338.7m of the net profit during the
second quarter.
Mobily signed USD200m agreement with
Canadian export agency, in June 2014, to
acquire equipment from Alcatel-Lucent.
Financials: 2Q14 results

Revenues were largely flat y-o-y at SAR5990m vs
HSBCe SAR6323m. Increase in revenues for first
half was on the back of increase in data revenues,
both fixed and mobile. Data revenues were 39%
of total revenues for the first six months vs 27%
last year. FTTH covered 850 thousand homes
with fiber-optic sales increasing by 89% y-o-y
during the first six months. EBITDA margin for
the quarter was down 4 pp y-o-y to 35% (down 1
pp q-o-q) vs HSBCe 38%. Net profit came at
SAR1312m for the quarter vs HSBCe
SAR1567m, down 19% y-o-y due to cancellation
of IRU deal with Etihad Atheeb, leading to a
write-off of SAR338.7m. Dividend of SAR1.25
per share was proposed for the quarter (SAR1.20
last year).
Valuation
We value Mobily using a three-stage DCF model
with a WACC of 9.9% based on a 12.5% cost of
equity (risk-free rate of 3.0%, market risk
premium of 9.5%, including an inflation
differential of 3.5% in Saudi Arabia, and an
equity beta of 1.0), as well as a 4% pre-tax cost of
debt, using a debt-to-asset ratio of 30%.
234

above and below the hurdle rate for Saudi Arabia
stocks of 9.0%. Our target price implies a
potential return of 13%, which is within the
Neutral band of our model; therefore, we are
reiterating our N rating. Potential return equals the
Risks
Key downside risks include: A potentially
aggressive price war with Zain KSA as it tries to
achieve critical mass, STCs aggressive build-up of
its fixed network adversely affecting mobile
broadband growth in the Kingdom, potential market
disruption from the launch of the new MVNOs
and/or additional infrastructure based competitors,
failure to secure additional spectrum to facilitate
continued broadband growth and failure to reverse
the adverse working capital movements evident
over the past three years. Key upside risks include:
Faster economic growth than anticipated, less
impact from the new MVNOS than expected,
stronger pricing trends in mobile data and better
growth in the ICT area than forecast.
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Etihad Etisalat(Mobily)

Year to
Valuation data
12/2013a
12/2014e
12/2015e
12/2016e

Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
25,191
9,190
-2,502
6,688
67
6,755
6,755
-78
6,676
6,676
26,808
9,837
-2,935
6,902
40
6,942
6,942
-125
6,818
6,818
28,505
10,408
-3,354
7,054
38
7,092
7,092
-128
6,964
6,964
30,261
10,861
-3,612
7,249
44
7,293
7,293
-131
7,162
7,162
7,070
-5,424
-5,487
-3,619
2,226
3,754
8,199
-6,166
-6,166
-3,696
1,663
3,587
9,021
-5,131
-5,131
-4,004
114
5,187
9,778
-5,144
-5,144
-4,312
-321
5,630
9,874
25,273
14,889
1,126
50,042
11,996
11,970
10,845
26,777
36,914
9,300
27,624
15,775
2,012
52,705
12,307
12,970
10,959
29,429
38,381
8,727
29,729
17,596
3,833
56,058
12,618
14,470
10,637
31,971
39,601

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Year to
12/2013a
12/2014e
12/2015e
12/2016e
3.0
8.3
2.3
10.0
2.8
5.6
5.5
2.9
7.9
2.1
9.8
2.5
5.4
6.0
2.7
7.5
2.0
9.6
2.3
7.7
6.4
2.6
7.1
2.0
9.3
2.1
8.4
6.9
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price

Capex
Dividends
Change in net debt
FCF equity
Neutral
(SAR)86.96
Reuters (Equity)
Market cap (USDm)
Free float (%)
Country
Analyst
Target price
7020.SE
17,853
40
Saudi Arabia
Herve Drouet
100
100
90
90
80
80
70
70
60
60
50
50
40
2012
2013
Etihad Etisalat(Mobily)
12/2013a
2014
40
2015
Source: HSBC
12/2014e
12/2015e
12/2016e
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
Bloomberg (Equity)
EEC AB
Market cap (SARm)
66,959
77804
Sector
Wireless Telecoms
Contact
44 20 7991 6827
Price relative
10,448
20,733
15,334
1,570
46,521
11,642
10,753
9,182
23,963
33,303

Year to
1
2
.
7
(SAR)98.00
6.6
7.0
8.0
11.0
10.9
6.4
7.0
3.2
2.8
2.1
6.3
5.8
2.2
2.2
2.2
6.2
4.4
2.8
2.8
2.8
0.8
23.4
29.8
16.1
36.5
26.6
0.8
20.9
26.9
14.6
36.7
25.7
0.8
19.9
24.8
14.0
36.5
24.7
0.8
19.7
23.3
13.6
35.9
24.0
38.3
1.0
77.0
40.5
1.1
75.6
37.2
1.1
82.3
33.3
1.0
91.9
8.67
8.67
4.80
31.12
8.85
8.85
5.20
34.78
9.04
9.04
5.60
38.22
9.30
9.30
6.00
41.52
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
235
abc
Equities
Saudi Arabia
July 2014

STC AB, Price SAR72, OW, TP
SAR71
Company description
STCs mobile monopoly ended in Saudi Arabia
when licenses were awarded to Mobily in FY 04
and Zain KSA in March 07. The Saudi fixed-line
market was liberalised in 2007 with the award of
three new fixed-line licenses. STC has a stated
goal of driving long-term growth through
international acquisitions although a series of
costly and underperforming international
acquisitions since 2007 has resulted in the
company now confining its expansion ambitions to
the Middle East only, particularly, we suspect, in
light of its positive experience with its investments
in Kuwait's VIVA (with a 26% stake), and its
100% subsidiary in Bahrain. STC also has a 35%
stake in Binariang (exposure to Malaysia, India,
and Indonesia); a 35% stake in Oger Telecom
(exposure to Turkey and South African markets)
and has recently sold out of Indonesia.
Investment thesis
STC is well placed to provide highly relevant
bundles that offer a clear value proposition as it is
the only operator in Saudi Arabia with a pervasive
presence in both fixed and wireless infrastructure.
While in many other markets, active regulatory
intervention has tended to undermine the
advantage that this infrastructure position affords
the historical incumbent operator, this is not so
evident in the case of the Saudi market. As a
result, STC has maintained significant advantages
in operating both a fixed and mobile network.
However, while STCs domestic operation have
236
improved owing to the uptake of fixed broadband

products in Saudi Arabia, its international
operations continue to face the dual headwinds of
slow revenue growth and declining margins.
STCs Turkish investment, Turk Telekom
(through Oger Telecom), faces margin pressure as
a result of aggressive competition, and its
operations in India and South Africa continue to
operate below critical mass. Recently it changed
the accounting treatment of its investment in
Aircel (India) which resulted in a boost to its
bottomline. Weak currencies and dollar-linked
debt in STCs overseas businesses also created
translation issues during 2013.
In South Africa, Cell C has to compete against the
industry leaders, Vodacom and MTN, and is
offering deep discounts in order to capture market
share, but progress towards achieving a solidly
profitable position is slow.
Recent news
In June 2014, government seized a plot of
area around 1m square metre from STC
which had a book value of around SAR105m
Also in June, the company raised SAR2bn via
a 10 year Sukuk which is the first issuance
under its newly established SAR5bn Private
Placement sukuk program.
Etihad Atheeb signed an IRU agreement with
STC in May which allows it to use STCs 30
thousand ports for 15 years as an initial phase
and has an option to access upto 100 thousand
in future.
abc
Equities
Saudi Arabia
July 2014
Financials: 2Q14 results

Service revenues for 2Q came at SAR11.7bn vs
HSBCe SAR11.5bn. EBITDA for 2Q was
SAR4.7bn, increase of 14% y-o-y, vs HSBCe
SAR4.8bn. Net profit for the second quarter up
96% y-o-y to SAR2.8bn (HSBCe SAR3.2bn)
mainly due to assets related to Axis and change in
accounting of its investment in Aircel group. Q-oQ increase in net profit (SAR412m increase) was
due to a) increase in revenue / operating profit b)
decrease in provision for Zakat & tax. Domestic
market saw huge jump in data traffic as monthly
data volume over 4G network surpassed total data
traffic over 2G and 3G together by 9%. FTTH
customers increased 44% y-o-y during the second
quarter. Enterprise business units overall
revenues were up 6% y-o-y during the 2Q.
Dividend of SAR0.75 per share for the quarter
was announced (SAR0.50 per share last year).
Valuation
We use the average of a DCF and a sum of the
parts model to value STC. In the DCF, we use a
risk-free rate of 3.5%, a market risk premium of
9.5%, including an inflation differential of 3.5%
in Saudi Arabia, and an equity beta of 1. Our
weighted cost of equity for STC is 12.5% leading
to a WACC of 11.8% for the stock. We assume a
long-term debt-to-equity ratio of 10-90%, and we
calculate a one year forward value of SAR70 per
share from our DCF. Our sum of the parts model
produces a valuation of SAR72, giving an average
of SAR71. For the domestic operations we use our
forecast for projected domestic EBITDA to which
we attach a 6.0x EV/EBITDA multiple.
Under our research model for stocks without a

volatility indicator the Neutral band is 5ppts
of 9.0%. At the time we set our target price it
implied a potential return which was above the
Neutral band; therefore, we are Overweight on the
stock. Potential return equals the percentage
when indicated.
Risks
Downside risks: increased losses from
international operations and the need to inject
more equity into the operations, Zain KSA
increasing competitive pressure in Saudi, leading
to erosion of ARPUs for all mobile operators,
regulatory developments damaging STCs
domestic and international market positions,
overpayment for international acquisitions, a
delay in NGN implementation, higher-thanexpected capex in international operations.
237
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Saudi Telecom Company

Year to
Valuation data
12/2013a
12/2014e
12/2015e
12/2016e

Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
45,602
18,520
-7,482
11,039
47
10,561
11,316
-231
9,972
10,392
47,290
18,916
-6,599
12,317
185
12,962
12,962
-648
11,886
11,886
48,822
19,529
-6,808
12,721
301
13,606
13,606
-680
12,925
12,452
50,325
20,130
-6,987
13,143
415
14,231
14,231
-712
13,520
13,004
19,640
-7,469
-7,530
-3,998
-34,972
10,748
18,896
-7,094
-7,094
-6,000
-5,802
11,385
19,166
-7,177
-7,177
-6,285
-5,704
11,957
19,850
-7,292
-7,292
-6,564
-5,994
12,527
3,988
39,689
39,604
24,861
95,997
18,862
9,807
-15,054
62,819
39,558
3,368
40,678
45,461
30,565
102,807
19,032
9,807
-20,758
68,986
39,910
2,748
41,603
51,605
36,558
109,929
19,199
9,807
-26,752
75,426
40,199

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Year to
12/2013a
12/2014e
12/2015e
12/2016e
2.9
7.2
3.4
13.9
2.5
7.6
3.1
2.7
6.7
3.2
12.1
2.3
8.0
4.2
2.5
6.2
3.0
11.6
2.1
8.5
4.4
2.3
5.7
2.8
11.1
1.9
8.9
4.6
Target price
(SAR)71.00
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price

Capex
Dividends
Change in net debt
FCF equity
Overweight
(SAR)72.00
Reuters (Equity)
Market cap (USDm)
Free float (%)
Country
Analyst
7010.SE
38,394
30
Saudi Arabia
Herve Drouet
77
77
67
67
57
57
47
47
37
37
27
2012
2013
12/2013a
Source: HSBC
12/2014e
12/2015e
12/2016e
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
-23.2
-11.6
-7.2
13.8
20.9
3.7
2.1
11.6
22.7
14.4
3.2
3.2
3.3
5.0
4.8
3.1
3.1
3.3
4.6
4.4
0.7
18.9
19.2
10.2
40.6
24.2
1.2
31.2
19.9
13.6
40.0
26.0
1.2
31.9
18.9
13.2
40.0
26.1
1.3
32.6
18.0
12.9
40.0
26.1
-16.1
-0.5
-23.6
-0.8
-29.5
-1.1
-34.6
-1.3
4.99
5.20
2.25
28.47
5.94
5.94
3.00
31.41
6.46
6.23
3.14
34.49
6.76
6.50
3.28
37.71
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
238
Bloomberg (Equity)
STC AB
Market cap (SARm)
144,000
126522
Sector
DIVERSIFIED TELECOMS
Contact
44 20 7991 6827
Price relative
4,608
38,406
32,364
17,789
87,633
18,251
8,537
-9,252
56,933
39,337

Year to
1
.
4
2014
27
2015
abc
Equities
Saudi Arabia
July 2014
Zain KSA
ZAINKSA AB, Not rated
Company description
Zain KSA is one of three mobile operators in Saudi
Arabia with a market cap of around USD3bn. Zain
Group (Kuwait) is the largest shareholder with a
37% stake while the rest is held by Saudi institutions
and local retail investors.
Company started commercial operations in 2008
and Zain KSA now has a market share of 16%
with an ARPU of USD16per month.
Zain KSAs network covers 93% of the
population through more than 6000 network sites.
Data revenues (ex SMS & VAS) constitutes 16%
of total revenues and its 4G LTE network covers
around 52% of the population
Internet service revenues increased 94% y-o-y and

6% q-o-q in Q2 2014 as internet service
subscribers grew by 107% y-o-y and 31% q-o-q.
Internet data traffic grew by 564% y-o-y in Q2
and 64% q-o-q.
Recent news
Recently CITC announced re-tender of the
MVNO license on Zains network, which was
earlier granted to Axiom in 2013.
Also, during 2Q14 company singed a network
expansion and upgrade agreements worth
SAR4.5bn (USD1.2bn) with five leading
global technology companies.
Financials
The company had revenues of SAR6523m in
2013, up 5.7% y-o-y. This was driven by increase
in revenues in internet segment and postpaid
segment. EBITDA was SAR891m, implying a
margin of c13.7%. Company posted a net loss of
SAR-1651m in 2013.
2Q14 results
EBITDA increased by 22% y-o-y to SAR564m in

the first half of 2014, implying margins of 18% vs
14% last year.
Net loss was down 11% y-o-y in second quarter of
2014 due to improvements in operational
efficiency, favourable judgements in legal cases
and adjustments in useful life of assets.
239
abc
Equities
Saudi Arabia
July 2014
Financials & valuation: Zain KSA
Not Rated
Valuation data
Year to
12/2010a
12/2011a
12/2012a
12/2013a

5,628
331
-1,494
-1,164
-1,196
-2,358
-2,358
0
-2,358
-2,358
Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
6,699
899
-1,710
-811
-1,114
-1,925
-1,925
0
-1,925
-1,925
6,404
879
-1,810
-932
-823
-1,749
-1,749
0
-1,749
-1,749
6,523
890
-1,840
-949
-723
-1,651
-1,651
0
-1,651
-1,651
462
-309
-307
0
42
177
-88
-311
-309
0
475
-390
-1,150
-562
-562
0
0
-1,708
229
-803
-803
0
-747
-510
21,155
4,298
2,603
702
28,055
5,600
12,509
11,807
6,129
27,353
20,253
4,059
2,432
780
26,744
4,847
17,060
16,279
4,293
25,963
19,274
4,285
4,391
2,385
27,950
3,924
14,855
12,470
8,452
25,565
18,351
4,293
3,315
1,293
26,242
3,594
11,622
10,329
6,759
24,949

Capex
Dividends
Change in net debt
FCF equity

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
(SARm)
12/2010a
12/2011a
12/2012a
12/2013a
3.8
NM
0.8
NM
1.1
1.4
0.0
3.2
23.5
0.8
NM
1.6
-3.7
0.0
3.3
24.0
0.8
NM
1.3
-15.8
0.0
3.2
23.7
0.8
NM
1.6
-5.3
0.0
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price
Year to
(SAR)10.00
Reuters (Equity)
Market cap (USDm)
Country
Analyst
Target price
7030.SE
2,880
Saudi Arabia
Not Rated
Year to
30
30
20
20
10
10
0
2012
Source: HSBC
12/2010a
12/2011a
12/2012a
12/2013a
87.4
19.0
171.9
-4.4
-2.2
1.8
1.3
0.2
-8.6
-38.5
-8.4
5.9
-20.7
0.3
-7.4
-44.8
-7.2
13.4
-12.1
0.3
-6.8
-20.7
-6.3
13.7
-14.5
0.3
-6.6
-24.4
-6.3
13.7
-14.6
1.9
35.7
0.0
3.8
18.1
0.0
1.5
14.2
-0.1
1.5
11.6
0.0
-2.18
-2.18
0.00
8.79
-1.78
-1.78
0.00
6.16
-1.62
-1.62
0.00
7.83
-1.53
-1.53
0.00
6.26
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
240
Bloomberg (Equity)
ZAINKSA AB
Market cap (SARm)
10,801
Sector
DIVERSIFIED TELECOMS
Contact
Not Rated
Price relative
0
2013
Zain KSA
1
.
4
(SAR)Not Rated
2014
Rel to Tadawul
Equities
Saudi Arabia
July 2014
abc
Utilities
241
abc
Equities
Saudi Arabia
July 2014
Utilities
Electricity demand fundamentals are being driven by strong
population growth
However, we see a lack of substantial catalysts to drive
profitability given the low tariffs

Solar and nuclear initiatives should keep capital requirements at
peak levels in the region while diversifying generation
Saudi Arabia utilities

Middle East utilities demand has been quite strong
in the past decade, usually posting high single
digit numbers annually. The main driver has been
population growth expanding from 330m to
395m in the past decade.
Given the abundance of fossil-based fuel in the
region, ruling governments have employed
subsidised tariffs that have led to further growth
in demand by boosting per capita residential
consumption in the area. The GCCs strong
economic performance driven by rising
commodity prices that near doubled per capita
GDP to USD35,000 levels today is the key
factor behind government subsidies.
However, we believe there are two main factors
ahead that could limit utilities demand growth in
the region in the medium term.
The main factor will likely be economic, as the
oil-price driven budget surplus will likely start to
erode as we move into 2015. We expect countries
with limited surpluses, such as Saudi Arabia, to
implement measures that aim to slow domestic
power and water demand, and leave as much oil
242
as possible for exports. Hence, we might see

price hikes for utilities in the coming quarters in
the region.
Another factor is the increasing power
conservation campaigns in the GCC to limit
excess consumption. While these are voluntary
measures at this stage, given the well-aboveaverage consumption in the region, we think it is
conceivable that there may be a drop in residential
consumption as a result of these campaigns
(National Programme in Saudi Arabia).
In addition to decreasing demand, GCC
governments are also pursuing ways of
diversifying generation capacities to ultimately
preserve as much oil as possible for exports. The
two main ways of diversifying generation
capacities are solar and nuclear capacity
development. Saudi Arabia has plans to develop
16 nuclear power plants in the next 20 years,
which are expected to cost around USD80bn,
according to the KSA Ministry of Energy.
Construction of the first plant is planned to start in
2016, with initial preparations to start in 2014.
Levent Bayar*
Analyst
HSBC Yatrim Menkul
Degerler A.S
+ 90 2123764617
levent.bayar@hsbc.com.tr
abc
Equities
Saudi Arabia
July 2014
Saudi among the top electricity consumers of the world

(kWh/capita)
Break-up of electricity usage in the Kingdom (%)
25,000
20,000
Industrial
20%
15,000
Others
4%
10,000
Residential
49%
5,000
Gov t.
12%
Norway
Canada
Kuwait
Finland
Qatar
Sweden
USA
Australia
Bahrain
UAE
Japan
Saudi Arabia
France
Germany
Russia
EU
UK
China
World avg.
Source: World Bank data 2011
Firm demand fundamentals
Saudi Arabia is among the largest consumers of

electricity in the world, with a consumption of
8,161 kWh per capita. Currently, it consumes
three times the world average, and this has grown
at a CAGR of 7% over the past decade against 1%
growth globally. The residential segment accounts
for the largest share of the total energy usage.
Strong consumption in the Kingdom is
underpinned by population growth. According to
UN estimates, the countrys population is forecast
to reach 34m by the end of the next decade, from
28m currently. The industrial segment has also
seen a firm growth in its consumption trends.
Thus, we believe an expanding industrial sector
led by the development of petrochemical cities
will likely play a pivotal role in the coming years.
According to the US Energy Information
Administration (EIA), Saudi Arabias electricity
generation capacity has to increase from the
present 55GW to 120GW by 2020 in order to
meet the rapidly growing demand.
commercial
15%
Source: Company data.
major, Saudi Electricity Company (SEC), as its

costs keep increasing (but tariffs remain fixed) as
it purchases more power from IPPs (to meet the
growing demand) at a higher cost.
Focus on non-fuel based energy sources
As discussed earlier, Saudi Arabia aims to generate

electricity from its first nuclear plant by 2020 and
has plans to develop 16 nuclear power plants over
the next 20 years, at a cost of around USD80bn,
according to the KSA Ministry of Energy.
Energy efficiency norms
Air conditioning represents the lions share of the

residential segment usage (roughly 70%). Saudi
has very low standards for energy efficiency for
cooling systems currently. The government is now
in the process of introducing regulations for A/C
use and mandatory insulation requirements for
buildings. This could impact energy consumption.
That said, it remains to be seen how effective the
new regulations will be, and how successfully
they will be implemented.
Another important factor contributing to increased

consumption is the heavily subsidised electricity
tariffs in the Kingdom. It has among the lowest
rates globally. Based on the amount consumed,
tariffs currently range between 5 and 26
halalas/kWh. That said, low tariffs have
negatively impacted profitability for the utility
243
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Equities
Saudi Arabia
July 2014
Saudi Electricity Company

(SEC)
SECO AB, Price SAR16.20, N, TP
SAR15.9
Company description
estimates, the countrys population is forecast to

reach 34m by the end of the next decade, from
28m currently.
SEC is engaged in generating, transmitting and

distributing electric power in the Kingdom of Saudi
Arabia, either directly or through its wholly or partly
owned subsidiaries. While it is currently
predominantly oil and gas fired, looking forward, the
company plans to build up capacity that utilises solar
and nuclear power in order to decrease oil
dependency, increase operational profitability, and
become more environmentally friendly.
Heavy capex and high debt levels create a drag
Investment thesis
SEC plans to increase capacity by 40,000MW

over the next 10 years. Based on our forecasts,
capex will likely amount to SAR45-50bn each
year. The company recently obtained a USD13bn
interest-free loan from the Kingdoms Ministry of
Finance to fund this project. Our forecasts suggest
net debt/EBITDA will average 8.0x during 201416e. We thus view the significant capex planned
as a near-term negative for SEC.
Saudis electricity demand should continue to be

powered by solid growth in the population. This
underpins SECs robust top-line growth, while its
aspirations in the renewable energy space are also
a positive, in our view. However, we believe high
capex plans and margin pressure owing to higher
costs for power sourced from other producers
warrant caution.
Margin outlook
Robust demand dynamics
Solar and deregulation are positives
Saudi Electricity Company (SEC) appears set to

witness firm growth in its top line (we look for a
9% CAGR over 2013-20e) as a result of
population-growth-driven power demand in Saudi
Arabia. More than half of the power in the
country is used by residential subscribers (49% in
2013; also the number of residential subscribers
grew by 6% y-o-y last year). According to UN
With a high solar radiation of 2,550 kWh/2 per

year, Saudi appears well set to obtain its goal of
41GW of solar power by 2032. We therefore see
SECs strong aspirations in the renewable energy
space as a positive. The company hopes to set up
its solar farm by 2015 and plans to attract
USD109bn of solar investment in order to
generate a third of its electricity by 2032.
244
Subsidised tariffs have impeded SECs profitability

growth. Also, with the company sourcing power
from IPPs (independent power producers) to meet
demand requirements, we believe margins will have
been affected by higher purchasing costs. We
forecast the EBITDA margin to average 38.7% over
the next three years.
Levent Bayar*
Analyst
HSBC Yatrim Menkul
Degerler A.S
+ 90 2123764617
levent.bayar@hsbc.com.tr
abc
Equities
Saudi Arabia
July 2014
The company has also stated that it may split its

generation, distribution and transmission businesses
as the sector deregulates. We see this as a potential
long-term positive for SEC, with the more profitable
operations (generation and transmission) potentially
being separated from the loss-making (due to
subsidies) distribution business.
Financials
SEC recently reported solid Q2 14 results, posting
a net income of SAR3.7bn, up 143.5%. This was
primarily on the back of a one-off gain of
SAR6.2bn from the reversal of accounts
receivable provisions.
However, our concerns regarding SECs tight
profitability window given the high costs and the
regulated tariff structure persist. In the long term,
we do not expect to see a strong improvement in
operational figures as long as tariffs remain as
they are. This is mainly because, while greater
power consumption does increase power bills
within the progressive tariff structure, it also
forces SEC to purchase more power from IPPs at
a higher cost. Combined with this, we forecast the
high levels of capex will result in negative FCF in
the near term.

return that was within the Neutral band. We
therefore rate the stock Neutral. Potential return
Risks
If demand increases more quickly than expected

(i.e. by more than 5% a year) and supply is unable
to keep up, SEC would have to purchase a greater
amount of power from IPPs, increasing costs and
hurting profitability.
We believe the introduction of a tariff hike would

be a key upside risk which could boost
operational profitability and valuation.
If SEC launches the plan of diversification of the
company into three segments with the aim to
improve individual business lines, it could be
positive for the valuation of the company.
Valuation
We use an ROE-driven PB regression methodology
to value SEC. With this methodology we run a
regression of HSBC EM power generators' PB and
ROE values for 2014e. Our regression produces a
relationship of: PB = 1.08*ROE + 1.05. Given an
average 5.7% RoE for 2014e, we thus arrive at a
target price of SAR15.9.
245
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Equities
Saudi Arabia
July 2014
Financials & valuation: Saudi Electricity Company

Year to
Valuation data
12/2013a
12/2014e
12/2015e
12/2016e

Revenue
EBITDA
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
36,820
13,899
-12,009
1,889
0
3,036
3,036
0
3,036
3,036
40,267
15,651
-12,268
3,383
-932
3,315
3,315
0
3,315
3,315
44,418
17,195
-13,301
3,894
-932
3,824
3,824
0
3,824
3,824
48,620
18,769
-14,338
4,431
-932
4,301
4,301
0
4,301
4,301
23,791
-41,014
-41,214
-547
18,325
-18,735
17,028
-41,206
-41,206
-547
24,725
-25,365
19,757
-41,398
-41,398
-547
22,189
-22,859
27,314
-41,590
-41,590
-547
14,824
-15,468
0
267,180
32,292
3,261
301,862
135,211
100,868
97,607
59,597
160,999
0
295,278
35,097
3,118
332,765
140,436
122,914
119,796
62,874
186,820
0
322,530
39,699
4,740
364,619
151,701
139,360
134,620
66,627
205,787

Current assets
Cash & others
Total assets
Gross debt
Net debt
Shareholders funds
Invested capital
Year to
12/2013a
12/2014e
12/2015e
12/2016e
3.7
9.9
1.0
22.2
1.2
-29.2
4.3
4.0
10.4
1.0
20.4
1.1
-39.0
4.3
4.2
10.8
1.0
17.7
1.1
-35.1
4.3
4.1
10.6
1.0
15.7
1.0
-23.8
4.3
Target price
(SAR)15.90
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Issuer information
Share price

Capex
Dividends
Change in net debt
FCF equity
Neutral
(SAR)16.20
Reuters (Equity)
Market cap (USDm)
Free float (%)
Country
Analyst
5110.SE
17,997
19
Saudi Arabia
Levent Bayar
20
20
18
18
16
16
14
14
12
12
10
10
8
2012
2013
Saudi Electricity Company
12/2013a
Source: HSBC
12/2014e
12/2015e
12/2016e
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
9.4
-0.6
-45.5
17.7
17.7
9.4
12.6
79.1
9.2
9.2
10.3
9.9
15.1
15.4
15.4
9.5
9.2
13.8
12.5
12.5
0.3
1.8
5.5
1.2
37.7
5.1
128.2
5.2
32.6
0.3
2.5
5.7
1.5
38.9
8.4
16.8
163.8
6.2
17.4
0.3
2.5
6.2
1.5
38.7
8.8
18.4
190.5
7.0
16.5
0.2
2.5
6.6
1.5
38.6
9.1
20.1
202.0
7.2
20.3
0.73
0.73
0.70
13.64
0.80
0.80
0.70
14.30
0.92
0.92
0.70
15.09
1.03
1.03
0.70
15.99
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Net debt/equity
Net debt/EBITDA (x)
DPS
Book value
246
Bloomberg (Equity)
SECO AB
Market cap (SARm)
67,499
162715
Sector
ELECTRIC UTILITIES
Contact
+90 212 3764617
Price relative
0
237,745
31,961
4,470
272,995
132,550
77,351
72,881
56,829
132,687

Year to
1
.
9
2014
8
2015
Equities
Saudi Arabia
July 2014
abc
Notes
247
Equities
Saudi Arabia
July 2014
Notes
248
abc
Equities
Saudi Arabia
July 2014
abc
Disclosure appendix
Analyst Certification
Each analyst whose name appears as author of an individual chapter or individual chapters of this report certifies that the views
about the subject security(ies) or issuer(s) or any other views or forecasts expressed in the chapter(s) of which (s)he is author
accurately reflect his/her personal views and that no part of his/her compensation was, is or will be directly or indirectly
related the specific recommendations(s) or view(s) contained therin: Raj Sinha, Aybek Islamov, Nicholas Paton, Patrick
Gaffney, Sriharsha Pappu, Herve Drouet, Levent Bayar, Simon Williams, Razan Nasser, Vijay Sumon, John Lomax and
Joaquim De Lima
Important disclosures
Equities: Stock ratings and basis for financial analysis
HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which
depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations.
Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities
based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon;
and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative,
technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating.
HSBC has assigned ratings for its long-term investment opportunities as described below.
This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when
HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at
www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this
website.
HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's
existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating
systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research
report. In addition, because research reports contain more complete information concerning the analysts' views, investors
should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not
be used or relied on in isolation as investment advice.
Rating definitions for long-term investment opportunities

Stock ratings
HSBC assigns ratings to its stocks in this sector on the following basis:
For each stock we set a required rate of return calculated from the cost of equity for that stocks domestic or, as appropriate,
regional market established by our strategy team. The price target for a stock represents the value the analyst expects the stock
to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the
potential return, which equals the percentage difference between the current share price and the target price, including the
forecast dividend yield when indicated, must exceed the required return by at least 5 percentage points over the next 12 months
(or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be
expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10 percentage points
for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.
Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility
status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review,
expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily
triggering a rating change.
249
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Equities
Saudi Arabia
July 2014
*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12
months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However,
stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past
month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating,
however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.
Rating distribution for long-term investment opportunities

As of 25 July 2014, the distribution of all ratings published is as follows:
Overweight (Buy)
44%
(31% of these provided with Investment Banking Services)
Neutral (Hold)
37%
Underweight (Sell)
19%
Information regarding company share price performance and history of HSBC ratings and target prices in respect of long-term
investment opportunities for the companies that are the subject of this report is available from www.hsbcnet.com/research.
HSBC & Analyst disclosures

Disclosure checklist
Company
ABDULLAH A. M. AL-KHODARI
ABDULLAH AL OTHAIM MARKETS COM
AL MOUWASAT MEDICAL SERVICES C
ALMARAI
ALRAJHI BANKING & INVESTM
ARAB NATIONAL BANK
ASTRA INDUSTRIAL GROUP
BANQUE SAUDI FRANSI
DAR AL ARKAN
ETIHAD ETISALAT (MOBILY)
FAWAZ ABDULAZIZ ALHOKAIR
HERFY FOOD SERVICES
JABAL OMAR DEVELOPMENT
COMPANY
JARIR MARKETING CO
MAADEN
NATIONAL INDUSTRIALIZATIO
NATIONAL PETROCHEMICAL CO PETR
RABIGH REFINING AND PETRO
RIYAD BANK
SAMBA FINANCIAL GROUP
SAUDI AIRLINES CATERING
SAUDI ARABIAN FERTILIZER
SAUDI BASIC INDUSTRIES CO
SAUDI ELECTRICITY COMPANY
SAUDI INDUSTRIAL INVESTME
SAUDI INTERNATIONAL PETRO
SAUDI KAYAN PETROCHEMICAL
SAUDI PHARMACEUTICAL
SAUDI TELECOM COMPANY
SAVOLA
YANBU CEMENT COMPANY
YANBU PETROCHEMICAL
ZAMIL INDUSTRIES
Source: HSBC
250
Ticker
Recent price
Price Date
Disclosure
1330.SE
4001.SE
4002.SE
2280.SE
1120.SE
1080.SE
1212.SE
1050.SE
4300.SE
7020.SE
4240.SE
6002.SE
4250.SE
50.50
111.00
107.50
72.75
68.50
29.90
48.70
35.00
13.95
88.53
106.50
104.25
50.50
24-Jul-2014
24-Jul-2014
24-Jul-2014
24-Jul-2014
24-Jul-2014
24-Jul-2014
24-Jul-2014
24-Jul-2014
24-Jul-2014
25-Jul-2014
24-Jul-2014
24-Jul-2014
24-Jul-2014
4
4
4
1, 2, 4, 5, 7
7
6, 7, 11
7
6, 7, 11
11
1, 2, 4, 5
4, 7
4
1, 5
4190.SE
1211.SE
2060.SE
2002.SE
2380.SE
1010.SE
1090.SE
6004.SE
2020.SE
2010.SE
5110.SE
2250.SE
2310.SE
2350.SE
2070.SE
2050.SE
3060.SE
2290.SE
2240.SE
201.81
38.50
36.80
34.00
33.86
19.05
44.03
190.00
160.75
128.75
17.35
39.50
38.00
15.45
47.90
82.00
74.50
72.60
61.50
25-Jul-2014
24-Jul-2014
24-Jul-2014
24-Jul-2014
25-Jul-2014
24-Jul-2014
25-Jul-2014
24-Jul-2014
24-Jul-2014
24-Jul-2014
24-Jul-2014
24-Jul-2014
24-Jul-2014
24-Jul-2014
24-Jul-2014
24-Jul-2014
24-Jul-2014
25-Jul-2014
24-Jul-2014
4
5
2, 6, 7
5, 6, 7
5
6, 7, 11
2, 4, 6, 7, 11
4
1, 2, 5, 6, 7, 11
1, 2, 5, 6, 7, 11
1, 2, 5, 6, 7, 11
4
2, 5
5
4
2, 6, 7
4, 6, 7
4
4, 5
4, 7
Equities
Saudi Arabia
July 2014
1
2
3
4
5
6
7
8
9
10
11
abc
HSBC has managed or co-managed a public offering of securities for this company within the past 12 months.
HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next
3 months.
At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this
company.
As of 30 June 2014 HSBC beneficially owned 1% or more of a class of common equity securities of this company.
As of 31 May 2014, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of investment banking services.
and/or paid compensation to HSBC in respect of non-investment banking securities-related services.
and/or paid compensation to HSBC in respect of non-securities services.
A covering analyst/s has received compensation from this company in the past 12 months.
A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as
detailed below.
A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this
company, as detailed below.
At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in
securities in respect of this company
HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives)
of companies covered in HSBC Research on a principal or agency basis.
Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment
banking revenues.
Whether, or in what time frame, an update of this analysis will be published is not determined in advance.
For disclosures in respect of any company mentioned in this report, please see the most recently published report on that
company available at www.hsbcnet.com/research.
Additional disclosures
1
2
3
This report is dated as at 28 July 2014.

All market data included in this report are dated as at close 22 July 2014, unless otherwise indicated in the report.
HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research
operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier
procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or
price sensitive information is handled in an appropriate manner.
As of 18 Jul 2014, HSBC owned a significant interest in the debt securities of the following company(ies)
:ALMARAI,BANQUE SAUDI FRANSI,NATIONAL INDUSTRIALIZATIO,RIYAD BANK,SAUDI ARABIAN
FERTILIZER,SAUDI BASIC INDUSTRIES CO,SAUDI ELECTRICITY COMPANY,SAUDI INTERNATIONAL
PETRO,SAUDI TELECOM COMPANY,SAVOLA
HSBC Saudi Arabia is acting as Financial Advisor to Saudi Arabian Mining Co (Maaden), in its rights issue
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251
Equities
Saudi Arabia
July 2014
abc
Disclaimer
* Legal entities as at 30 May 2014
Issuer of report
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[423840]
252
MENA Research Team
Raj Sinha*
Head of EEMEA equity research
+971 4 423 6932
raj.sinha@hsbc.com
Equities
Saudi Arabia
July 2014
Ammash Aljuraid*
Analyst
+966 11 299 2105
ammashaljuraid@hsbc.com
Sriharsha Pappu*
Analyst
+971 4 423 6924
Sagar Kumar*
Analyst
+966 11 299 2104
sagar.kumar@hsbc.com
Vikram Viswanathan*
Analyst
+971 4 423 6931
vikramviswanathan@hsbc.com
Yazeed M Alturki*
Analyst
+966 11 299 2260
yazeedmalturki@hsbc.com
Nicholas Paton*
Analyst
+971 4423 6923
Telecom
Herve Drouet*
Analyst
HSBC Bank Plc
+44 20 7991 6827
Simon Williams
Chief Economist, Middle East and North Africa
+971 4 423 6925
Rana Nasser
Senior Economist, Middle East and North Africa
+971 4423 6928
Egypt
Shirin Panicker*
Analyst
HSBC Securities, Egypt, S.A.E.
+202 2529 8439
shirinpanicker@hsbc.com
Saudi Arabia
A guide to the market
Equities
United Arab Emirates

Aybek Islamov*
Analyst
+971 4 423 6921
aybek.islamov@hsbcib.com
Saudi Arabia
Saudi Arabia
Analyst
+966 11 299 2100
After moves towards increased accessibility over the past seven years, the Saudi Arabian
cabinet has now authorised the Capital Market Authority to allow foreign institutions to trade
stocks on the Saudi stock market, paving the way for potentially a complete opening of the
market in 2015
We believe valuations should see a positive effect from the potential inclusion of the stocks
in various equity indices, which could follow soon after the opening of the market
Oilfield services
Peter Hitchens*
Analyst
HSBC Bank plc
+44 20 7991 6822
peter.hitchens@hsbcib.com
In this report we provide a macro overview of the market, and look at this new opportunity
from an equity strategy, industry sector and stock perspective
Utilities
Levent Bayar*
Analyst
HSBC Yatirim Menkul Degerler A.S.
+90 212 3764617
leventbayar@hsbc.com.tr
Equity Strategy
John Lomax*
Head of Equity Strategy, GEMs
HSBC Bank plc, London
+44 20 7992 3712
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations.
By the MENA Research Team
Issuer of report: HSBC Bank Middle East Limited, Dubai
July 2014
Disclosures and Disclaimer This report must be read with the disclosures and analyst
certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

Saudi Arabia A Guide To The Market by HSBC

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MENA Research Team

United Arab Emirates

By the MENA Research Team

Issuer of report: HSBC Bank Middle East Limited, Dubai

HSBC Saudi Arabia coverage

________ RoE __________

Equity Market Strategy

Sectors & companies

Arab National Bank

Banque Saudi Fransi

Samba Financial Group

Alrajhi Banking & Investment

Saudi Hollandi Bank

Saudi Investment Bank

Chemicals & fertilisers

Methanol Chemicals Co (Chemanol)

Saudi Basic Industries Co (SABIC)

National Industrializatio (Tasnee (NIC))

Saudi Industrial Investment (SIIG)

National Petrochemical Company (Petrochem)

Saudi International Petro (Sipchem)

Rabigh Refining and Petro (PetroRabigh)

Saudi Arabian Fertiliser Company (SAFCO)

Cement & construction

Yamamah Cement Company

Saudi Cement Company (SACCO)

Abdullah A. M. Al-Khodari Sons

Saudi Arabian Amiantit Co.

Saudi Steel Pipes

Arabian Pipes Co.

Middle East Specialized

Saudi Cable Co.

Saudi Paper Manufacturing

United Wire Factories

Abdullah Al Othaim Markets

Saudi Real Estate Co.

Emaar Economic City

Fawaz Abdulaziz Alhokair

Jarir Marketing Co.

Herfy Food Services

The Mediterranean & Gulf Insurance & Reinsurance Co

Saudi Airlines Catering

Al Khaleej Training & Education

Al Tayyar Travel Group

Budget (United International Transportation Co.)

The Company for Cooperative Insurance (Tawuniya)

Malath Cooperative Insurance & Reinsurance Co

Etihad Etisalat (Mobily)

Saudi Telecom Company

eXtra (United Electronics Co.)

Farm Superstores (Saudi Marketing Co.)

Saudia Dairy & Foodstuff Company

Saudi Automotive Services Co.

Saudi Ceramic Co.

Saudi Fisheries Co.

Shaker (Al Hassan Ghazi Ibrahim Shaker Co)

Astra Industrials Group

Al Mouwasat Medical Services Co

National Medical Care Co (NMCC)

Saudi Pharmaceuticals (SPIMACO)

Al Hammadi Dev. & Investment Co.

Saudi to open its equity

Next steps for the Saudi authorities

RoE __

Potential EM regional Indices + Saudi Arabia

Current EM Index

Potential EM country Indices + Saudi Arabia

Potential EM sectors + Saudi Arabia

Potential EM regional Indices + Saudi Arabia

_ Current FM index __

_New FM Index + Saudi Arabia _

Potential FM sectors + Saudi Arabia

_ Coefficients __